US Dollar Index (DXY) Hits Long-Term Resistance
The US Dollar Index, which has been growing rapidly in recent weeks, hit long-term resistance. Much depends on further movements of the DXY, not only in the wider financial sector, but also in the Bitcoin and cryptocurrency markets.
A rise in the US dollar index is often a signal of uncertainty and fear in financial markets. Additionally, the DXY has a long-term negative correlation with the price of Bitcoin and the cryptocurrency market.
The latest releases of quarterly reports from major US corporations have been below expectations. Next, investors continue to price in the unstable global situation with the war in Ukraine and the lingering threat of the COVID-19 pandemic in China. Rising inflation in Western countries and rising interest rates are additional factors that signal the danger of a recession.
All of this creates an ideal environment for liquidity, so the DXY rises are not a surprise. How long will they last? Will the long-term resistance that the dollar has just faced put an end to its ascent and cause a rebound in the financial markets?
Bullish DXY Reaches Long-Term Resistance
On April 29, the US Dollar Index hit a long-term resistance zone (red rectangle), peaking just below the 104 level. In the weekly chart, it can be seen that this zone has been in place since the turning 2016-2017 and was retested in March 2020.
In January 2021, the DXY bottomed at the 82 level, after which the index consolidated for 5 months to begin a 16.5% rise in May 2021 that continues today. In the meantime, the dollar managed to break through and confirm as support two important resistance levels. The first at 94.5 (red line) and the second near 98 (yellow line).
The weekly technical indicators give very bullish readings, but at the same time signal that an overbought level has been reached. The RSI is at 78.5 (green line) – a high the DXY last recorded in March 2015. The MACD is generating consecutive green bars of bullish momentum and its histogram is rising.
Meanwhile, the BBWP, which is a measure of volatility, generated its first 100% maximum reading (arrow) since August 2020 and its second red reading in 7 years. This means that the bullish momentum has peaked and a period of cooling is to be expected.
A return to earth?
Even more overbought readings are provided by the daily chart, where we see RSI above 80 and extreme signals from BBWP. DXY reacted to hitting resistance yesterday with a slight decline.
A slight bearish divergence has appeared on the MACD (red lines). On the other hand, the RSI, although clearly overbought, does not yet give bearish signals on the daily interval. However, should the long-term resistance level be respected, we can expect a correction of the 0.5-0.618 Fib retracement and validation of the 95-97 area as support.
Cryptocurrency market analyst @TheRealPlanC tweeted a chart of DXY in which he highlighted high readings on the RSI. At the same time, he drew attention to the Bollinger Band, above which the DXY high range has been closing for several days. This is a bullish signal of a strong uptrend, but the analyst comments that “the return to earth [is] come at some point.
Correlation of DXY with BTC and the altcoin market
The DXY has a long-term negative correlation with the price of BTC. When the dollar index rises, the price of Bitcoin falls and vice versa. It hasn’t been as strong in every period, but the long-term monthly chart shows a clear relationship.
If the period of strong growth for the DXY were to end as it hits resistance in the 104 area, this could be a bullish signal for Bitcoin and the entire cryptocurrency market. However, on the other hand, if DXY breaks above resistance, BTC could continue its decline and plunge into a long-term bear market.
An additional argument for the first scenario was provided by another crypto market analyst @BTCfuel. In a tweet yesterday, he compared the inverted DXY chart with historical price action in the altcoin chart from 2018-2021.
The inverted DXY chart is at long-term support and is confirming a breakout from a falling wedge pattern. A similar situation occurred in the altcoin chart at the end of Q1/beginning of Q2 2020.
If this situation were to play out in the same way for the inverted DXY, we can expect a dynamic upward movement. This, in turn, would lead to a sharp drop in the value of the US Dollar Index and a hypothetical continuation of bullish trends in the traditional and crypto markets.
For the latest Bitcoin (BTC) analysis from BeInCrypto, Click here.
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