The U.S. dollar’s ability to continue its rally in Q2 could prove fatal for Bitcoin (BTC), which has demonstrated an inverse correlation with the dollar since January 2022.
Dollar paints “bull flag”
The U.S. dollar index (DXY), which measures the greenback’s strength against a basket of foreign currencies, reached its 21-month trading high of 99.82 on April 7, the highest level since May 2020.
The index now looks poised to continue its upside move further as it breaks out of a classic bullish continuation pattern — called a “bull flag.”
In detail, bull flags appear when the price consolidates lower inside a parallel descending channel after undergoing a strong uptrend (called flagpole). In theory, the pattern is resolved after the price breaks out of their range to the upside to reach the level located at a length equal to the flagpole when measured from the breakout point.
The bull flag setup therefore puts the next upside target for DXY at 101.
Golden cross on the weekly chart
The DXY index is also forming a bullish golden cross for the first time since April 2019.
Golden crosses occur when an asset’s short-term moving average rises above its long-term moving average. Many analysts consider the crossover as a bullish technical signal due to its history of preceding strong uptrends.
DXY’s last golden cross between its 50-week and 200-week exponential moving averages (EMAs) came before a 4% upside move.
A similar bullish setup now nears for a 50-200 EMA crossover in April, notes Alexander Mamasidikov, co-founder of crypto wallet service MinePlex.
“The formation of the golden cross on the U.S. dollar index marks a period of temporary strength for the greenback with an expectation for it to tick stronger growth potentials against other currencies,” he explained, adding:
“The ensuing strength of the U.S. dollar following the golden cross formation will help to stump the impact of inflation as the greenback’s purchasing power is boosted.”
Where does it leave Bitcoin?
Interestingly, Bitcoin has been forming the opposite setup to the dollar, dubbed a bear flag — suggesting more pain ahead for the BTC/USD pair.
Bear flags appear when the price consolidates higher inside a parallel ascending channel and resolve after it breaks below the channel’s lower trendline with convincing volumes. In a “perfect” scenario, a bear flag breakout results in the price falling as low as the height of the previous downtrend.
Thus, Bitcoin could see a drop to the flag’s lower trendline around $40,000, opening the door for a drop toward $32,000.
There it is, now we’ll check off the 2nd target box on $DXY drawn months ago.
– Daily, Weekly, & Monthly RSI look bullish
– Daily, Weekly, & Monthly MACD look bullish
– Above 200 W MA since November
– May 2020 last time it was this high
— Jesse Olson (@JesseOlson) April 7, 2022
Nonetheless, Mamasidikov says Bitcoin could hold above $42,500 even if the dollar rises on the other end of the spectrum.
Recalling the adoption boom of summer 2021 (when Bitcoin’s correlation with the DXY was largely positive), investors continue to hodl BTC as a part of their long-term strategy.
“Despite the seeming uncertainty in the market, Bitcoin has formed strong support at $42,500 and has the fundamental backing to retest $47,000 in the short term.”
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