Bitcoin (BTC) surged nearly 60% to around $27,000 in 2023 amid expectations that the Federal Reserve would halt its quantitative tightening amid the US banking crisis. Despite this, the price of BTC did not definitely exceed the level of USD 30,000.
Buyer exhaustion at this key psychological level has led to a price correction towards $25,000 over the past week. Interestingly, the drop strengthened Bitcoin’s correlation with several traditional financial indicators.
But does that increase the risk that Bitcoin will continue its downtrend in Q2? Let’s take a closer look.
US dollar index double bottom
The US Dollar Index (DXY), which measures the strength of the dollar against a basket of major foreign currencies, rose 1.4% to 102.70 in the week ending May 14. The gain was the best week for the dollar since September 2022.
Interestingly, the dollar’s rally left behind a potential double bottom pattern, confirmed by two lows near a similar horizontal price level of around 100.75. The double bottom pattern is a bullish reversal setup, suggesting that DXY could move up towards 105.85 over the next few months.
The weekly DXY Relative Strength Index (RSI), which rebounded after reaching 35 – just five points above the oversold threshold – further points to a bullish continuation, which is usually a bad omen for the Bitcoin price.
The main reason is the strengthening negative weekly correlation between Bitcoin and DXY, with a factor of around -50 as of May 14.
Earlier this week, the latest US Consumer Price Index (CPI) report showed that headline inflation fell to 4.9% in April from 5% in the previous month. However, core inflation rose 5.5%, suggesting that underlying price pressures remain sticky, which has cooled the Fed’s rate cut expectations for the time being.
John Authers of Bloomberg writes:
“The odds of a ‘pause’ for interest rate hikes next month have now risen to a virtual certainty in the futures and swap markets as they were seen as an 84% chance before the numbers came out.”
The Fed’s pause should result in stabilization of the bond market. History shows that stable interest rates have been good for US Treasuries but bad for equities, with Pimco’s Erin Browne and Emmanuel Sharef saying:
“If the Fed stays at its maximum rate for at least six months and the US falls into recession, history suggests that the 12-month returns after the final rate hike could be flat for 10-year US Treasuries while the S&P 500 could sell sharply.”
So a drop in risk appetite would be a boon for the dollar while increasing the risk that Bitcoin will not recover $30,000 in the short term.
Gold price near a key turning point
The price of gold rose nearly 15% to over $2,000 an ounce as a result of the banking crisis. The positive correlation with Bitcoin has also strengthened with a weekly coefficient reading of 0.82 as of May 14.
But gold’s rally has pushed its price to an infamous horizontal resistance level near $2,075. In March 2022, this level played a key role in triggering a sharp reversal phase that led to gold falling by up to 22%.
Similarly, testing the level as resistance in August 2020 was preceded by an 18% price drop. If the scenario repeats itself in 2023, the price of gold could fall towards a 50-week exponential moving average (50-week EMA; red wave) near $1,850.
The weekly gold RSI hovering around the overbought reading of 70 points to a similar downside scenario. As a result of the positive correlation of this precious metal with Bitcoin, the latter may see a similar correction in Q2.
M2 money supply decreases
M2 measures cash in circulation plus dollars in bank accounts and money market accounts. The value of M2 increased by more than 40% during the Covid-19 pandemic due to the Fed’s quantitative easing, peaking at $21.84 trillion in January 2022.
It has since fallen to $20.81 trillion, down more than 4% from its peak in May 2023.
The more than 2% drop in M2 supply – which has happened four times so far – is bad news for the stock market as it preceded three depressions and one panic.
In other words, a significant drop in M2 could herald new lows for Bitcoin, which often moves in tandem with US stock indices.
Currently, the weekly correlation coefficient between Bitcoin and the Nasdaq-100 index is 0.92.
Bitcoin Price ‘Rising Wedge’
Bitcoin appears to be heading towards the $15,000-20,000 price range, depending on the potential breakout point from what appears to be an ascending wedge pattern.
For technical analysts, a rising wedge is a bearish reversal pattern that occurs when price moves higher within the range defined by the two contracting, ascending trend lines. It resolves after the price breaks below the lower trend line, falling all the way to the maximum height of the wedge.
Related: BTC Price Rebounds From Low of $25.8K on Low Whale Interest Alert
If this BTC price pattern is confirmed, especially considering the aforementioned macro metrics, the price of Bitcoin will drop to just $15,000 in 2023, a drop of around 45% from current price levels.
This article does not contain investment advice or recommendations. Every investment and trading move involves risk and readers should do their own research when making decisions.