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Bitcoin (
$75,708.00 ) (BTC) has rallied nearly 60% to around $27,000 in 2023 amid anticipations that the Federal Reserve would pause its quantitative tightening amid the U.S. banking crisis. Still, BTC price has failed to move beyond $30,000 decisively.
Buying exhaustion at this key psychological level led to a price correction toward $25,000 over the past week. Interestingly, the decline has strengthened Bitcoin ( $75,708.00 ) ’s correlation with several traditional financial metrics.
But does this raise the risk of Bitcoin ( $75,708.00 ) continuing its downtrend in Q2? Let’s have a closer look.
U.S. dollar index’s double bottom
The U.S. dollar index (DXY), which measures the greenback’s strength against a basket of top foreign currencies, rose 1.4% to 102.70 in the week ending May 14. The rise marked the dollar’s best week since September 2022.
Interestingly, the dollar’s rise left behind a potential double bottom pattern, confirmed by two low points near a similar horizontal price level of around 100.75. A double bottom pattern is a bullish reversal setup, suggesting DXY could rise toward 105.85 in the next few months.
DXY weekly price chart. Source: TradingView
DXY’s weekly relative strength index (RSI), which has undergone a rebound after reaching 35 — just five points above the oversold threshold — further hints at bullish continuation, which is typically a bad omen for Bitcoin ( $75,708.00 ) ’s price.
The main reason is the strengthening negative weekly correlation between Bitcoin ( $75,708.00 ) and DXY, with the coefficient around -50 as of May 14.
Earlier in the week, the latest U.S. consumer price index (CPI) report showed headline inflation dropped to 4.9% in April versus the previous month’s 5%. However, core inflation was up 5.5%, suggesting underlying price pressures remain sticky, which for now has cooled down Fed rate cut expectations.
John Authers from Bloomberg writes:
“The odds of a ‘pause’ in interest rate hikes next month have now risen to virtual certainty in futures and swaps markets, having been seen as an 84% chance before the numbers came out.”
A Fed pause should result in a stabilizing bond market. History indicates that stable interest rates have been good for U.S. Treasuries but bad for stocks, with Erin Browne and Emmanuel Sharef of Pimco saying:
“If the Fed pauses at its peak rate for at least six months and the U.S. slides into recession, then history suggests 12-month returns following the final rate hike could be flat for 10-year U.S. Treasuries, while the S&P 500 could sell off sharply.”
Thus, a souring risk appetite would be a boon for the dollar, while increasing the risk of Bitcoin ( $75,708.00 ) failing to reclaim $30,000 in the short term.
Gold price near key reversal point
The price of gold has risen nearly 15% to over $2,000 an ounce amid the banking crisis. The positive correlation with Bitcoin ( $75,708.00 ) has also grown stronger with its weekly coefficient reading at 0.82 as of May 14.
But gold’s rally has brought its price to an infamous horizontal resistance level near $2,075. In March 2022, this level was instrumental in triggering a sharp bearish reversal phase that led the gold’s value down by up to 22%.
XAU/USD weekly price chart. Source: TradingView
Similarly, testing the level as resistance in August 2020 preceded an 18% price decline. Should the scenario repeat in 2023, gold’s price could fall toward its 50-week exponential moving average (50-week EMA; the red wave) near $1,850.
Gold’s weekly RSI, treading around its overbought reading of 70, indicates at a similar downside scenario. As a result of the precious metal’s positive correlation with Bitcoin ( $75,708.00 ) , the latter may see a similar correction in Q2.
M2 money supply declines
M2 measures cash in circulation plus dollars in bank and money-market accounts. The M2 figure surged by more than 40% during the Covid-19 pandemic due to the Fed’s quantitative easing, hitting a peak of $21.84 trillion in January 2022.
It has since declined to $20.81 trillion, down over 4% from peak, in May 2023.
U.S. M2 monthly supply chart. Source: TradingView
A 2%-plus drop in the M2 supply — something which has happened four times to date — is bad news for the stock market since it preceded three depressions and one panic.
In other words, the significant move lower in M2 could foreshadow new lows for Bitcoin ( $75,708.00 ) , which often moves in tandem with U.S. stock indexes.
Currently, the weekly correlation coefficient between Bitcoin ( $75,708.00 ) and the Nasdaq-100 index is 0.92.
Bitcoin ( $75,708.00 ) price “rising wedge”
Bitcoin ( $75,708.00 ) appears to be heading toward the $15,000-$20,000 price range, depending on its potential breakdown point from what appears to be a rising wedge pattern.
BTC/USD weekly price chart. Source: TradingView
For technical analysts, a rising wedge is a bearish reversal pattern that appears when the price rises higher inside a range defined by two contracting, ascending trendlines. It resolves after price breaks below the lower trendline, falling by as much as the maximum wedge height.
Related: BTC price bounces at $25.8K lows amid warning over low whale interest
If this BTC price pattern is confirmed, particularly given the above-mentioned macro indicators, Bitcoin ( $75,708.00 ) price stands to decline to as low as $15,000 in 2023, down about 45% from current price levels.
This article does not contain investment advice or recommendations. Every investment and trading move involves risk, and readers should conduct their own research when making a decision.
