It’s no secret that the DXY (US dollar index) has been screaming higher this week.
But what does that mean for crypto?
Some say there’s no correlation. Others say a strong dollar is good for Bitcoin.
In today’s newsletter, I’ll break it all down and share exactly what a strong DXY could mean for cryptos in the coming weeks.
Plus, updates on BTC, ETH, ADA, DOT, and VET.
Let’s get it!
DXY and BTC Correlation Explained
I’ve discussed the significance of the DXY on the crypto market before.
In case you don’t know, the DXY is the US dollar index or at least the one most traders watch.
Some on Twitter believe the index has little to no bearing on cryptos. Perhaps they think Bitcoin and others have evolved enough to separate themselves from fiat influences.
I disagree entirely.
The fact is that most of us use BTCUSD to measure the value of Bitcoin. Even those outside the United States.
And the reason for that is simple. Like it or not, the US dollar is still the world’s reserve currency. In fact, most global debt is USD-denominated, which is why any global debt crisis would send the demand for the USD sky high.
Any pairing such as BTCUSD is made up of two parts. The first is the base currency or BTC, and the second is the quote currency or the USD.
If the USD increases in value, BTC is getting relatively weaker, at least in US dollar terms.
However, it isn’t an immediate correlation. For example, the DXY and BTCUSD can both be up or down on the same day.
It’s best to view this relationship over a much longer period. For that, we turn to the monthly chart below.
BTC is in blue. The DXY is in orange.
Notice how the two are inversely correlated over the longer term.
Yes, they can move in tandem. But over the longer run, the inverse relationship is indisputable, especially when looking at the peaks and troughs.
So what does this tell us?
It tells us that the DXY must back off for cryptos to have a run at all-time highs this year.
It’s no coincidence that the USD bottomed in May, the same time we saw Bitcoin fall from $60,000 to $30,000.
So unless the US dollar rally starts to fizzle out over the coming weeks, the odds of an extended bull market from cryptos looks bleak.
Bitcoin is still sideways between $40,000 and $45,000. However, the time could be running out for buyers.
The market is beginning to pressure the $39,000 – $40,000 support area, hinting at a move lower over the next few sessions.
There’s no guarantee it’ll happen, but lower highs into support is usually a telltale sign of weakness.
A close below $40,700 would re-expose $39,600 and potentially the $36,500 area. That’s my next target if BTCUSDT breaks lower.
Alternatively, the market would need to take out $45,000 and ideally close above that to relieve the downward pressure.
ETH is in a similar situation as BTC. Only I think an ascending trend line at $2,800 makes more sense in this case.
A close below that would open up the $2,600 region, which is the location of the March 2020 trend line and key horizontal support.
That’s going to be the must hold area for buyers.
A daily and especially weekly close below $2,600 would open the door to $2,350. That’s where I think ETHUSDT should land if BTCUSDT tests $36,500.
However, a close below the $2,600 area would also put ETH back within its previous range with a floor at $1,700. So a break lower could be troublesome unless we get a quick recovery.
ADA appears to have just barely closed below its December 2020 trend line on Tuesday.
We’ve seen some strength today. However, the market looks set to close back below that trend line near $2.06.
If that area continues to hold as resistance, the $1.90 level is probably next. A close below that would open up some much lower levels, perhaps even $1.
I know that sounds outlandish for many, but the ADAUSDT does not look healthy, at least not to me.
The alternative to that scenario would be a series of higher highs starting with $2.45. Take that area out, and we could see ADA rally back toward $3.
But until the market proves otherwise, the trend is lower.
DOT closed below the September 7th trend line on Tuesday. Like ADA, the market rallied on Wednesday but appears to be running out of gas.
If today closes below $27.50, it will confirm the area as new resistance.
As for support, $25.50 is going to be key. We could see some sideways action if that level is tested this week, but a close below that would confirm the head and shoulders.
And as I’ve mentioned recently, the measured objective of this pattern is around $12 – $13.
Between $25.50 and $13 is $17 support. Alternatively, a close back above $27.50 and a move back to $34 would suggest strength.
VET closed below its March 2020 trend line on Tuesday, and that area appears to be holding as new resistance today.
Yesterday’s breakdown was a big deal, in my opinion. Anytime you see a market trade below a level that supported the entire bull run, it’s worth your consideration.
If this continues, we could see VETUSDT slide lower toward $0.057. That’s the next key support on my radar.
However, while we could see a significant bounce from there, the overall market structure is bearish.
VETUSDT would need to close back above $0.0915 to turn bullish again.