Traders are carefully watching the build-up of a potentially bullish head and shoulders pattern on the US Dollar Index (DXY) chart. Meanwhile, a stronger US dollar weakens Bitcoin’s bullish fall, especially as Bitcoin is currently struggling to break out of the $ 30,000-35,000 trading range.

Three bottoms, one top

In particular, an inverted head and shoulders (IH&S) pattern forms after a downtrend. It contains three consecutive floors, with the middle groove (head) being the deepest compared to the other two (shoulders). Ideally, the shoulders should be equally high and wide. All three of these lows are defined by a price cap, commonly known as the limit, which acts as a resistance.

The DXY, which measures the strength of the US dollar against a basket of leading currencies, is now checking all the boxes to show that it has formed an IH&S pattern.

DXY is now examining the prospect of a bullish breakout on a close above its resistance. In this way, a technical profit target is set at a distance equal to the price gap between the cutout and the bottom of the head.

DXY sets up the reverse head and shoulder technique | Source: TradingView

DXY expects the setup to recover nearly 5% on a possible neckline breakout move.

In the meantime, DXY’s 50-day simple moving average (50-day SMA: blue wave) is expected to exceed the 200-day simple moving average (20-day SMA: yellow wave) to reach the golden cross to confirm. Traders view the Golden Cross as a bullish indicator.

USD basics

The weakness of the US dollar after Black Thursday in March 2020 acted as a boost to risk assets and global growth, boosted by quantitative easing by the US Federal Reserve (Fed) to mitigate the economic fallout from the Covid-19 pandemic. DXY ended 2020 with a loss of 6.83%.

However, early in 2021, the dollar shows signs of a trend reversal as the U.S. economy rebounds sharply amid a rapidly accelerating Covid-19 vaccination program. As markets reopen, demand for US dollar and US dollar-based investments is increasing among global investors.

Brent Johnson, Chief Executive Officer of Santiago Capital, describes the US dollar as “Giffen Good,” an asset class whose demand increases with price. He noted that despite rising inflation, global investors have increased their US dollar liabilities due to the Fed’s money printing.

“Continuing to issue US dollar bonds will increase demand in the future (debts must be paid in US dollars) and, as noted above, that demand does not decrease when prices rise.”

The speculative net futures position on DXY isn’t as pessimistic as it was in early 2021, said Kevin Kelly, financial analyst at Delphi Digital, adding that the setup is very similar to DXY’s positioning in early 2018, about 10% over the next 18 months .

Adjust inflation

A recent rally in the DXY market was accompanied by three consecutive monthly inflation spikes. According to the latest Labor Department release on Tuesday, the US consumer price index rose 5.4% year-on-year, its highest level in 12 months since August 2008.

James Freeman, associate editor at the Wall Street Journal, blamed the Fed’s monetary pressures for the persistent inflationary pressures and noted that the US dollar had dominated the devaluation as a result. However, the Fed has made inflation a temporary issue, giving bullish support to the DXY rally.

During a congressional hearing on Wednesday, Fed chairman Jerome Powell admitted that the current economic climate does not allow them to implement the bank’s quantitative easing measures, including its $ 120 billion high quality bond purchase program Dollars a month. Powell added, however, that the Fed will warn markets in advance if they decide to cut purchases.

Combined with lower interest rates, the Fed’s expansionary policies have resulted in cheaper lending, and thus increased demand for assets like homes, technology stocks, gold and even bitcoins. At the same time, however, fears that sustained rising inflation could cause the central bank to cut interest rates have also made assets appear overvalued and lose some of their annual profits.

Bitcoin, for example, which is often advertised as a hedge against higher inflation, has fallen more than 50% from its record high of around $ 65,000. The decline was mainly due to global regulatory raids, including an exodus of Chinese mining. But the decision by the Federal Open Market Committee in mid-June to cut interest rates in 2023 could also contribute to its declining momentum.

Bitcoin temporarily fell from $ 65,000 to $ 28,600 | Source: TradingView

Kelly notes:

“If the US dollar reverses, it could chill some of the most popular trades of the year.”

“Commodities, gold, stocks and bitcoin are all vulnerable to a stronger US dollar, although the speed at which it moves is still an important factor.”

However, some analysts see a rising US dollar as no threat to Bitcoin and believe that investors will continue to align part of their portfolios with the emerging global asset.

For example, Cathie Wood, CEO of ARK Invest, told CNBC that after overcoming worries related to China’s recent crypto mining ban and carbon footprint, Bitcoin could take a stronger position.

An Intertrust survey of hedge fund CFOs around the world also found that they will significantly increase their crypto exposure by 2026. 17% of respondents expect Bitcoin and similar digital assets to allocate more than 10%.

Mr. Teacher

According to Cointelegraph

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