Timing A Dollar (DXY) Trend Reversal And Its Impact On Bitcoin

The DXY Dollar Currency Index is above the 100 level for the first time since the pandemic struck and lax monetary policy sent Bitcoin — and inflation rates — soaring. 

When or will the trend weaken, and what might continued strength or sudden reversal mean for Bitcoin and the rest of crypto?

Fed Rate Hike Expectations Push DXY To Two-Year High

Global markets have taken a beating following the US Fed announcing a series of rate hikes in a response aimed at curbing the highest inflation rate in more than 40 years. 

Fed Governor Lael Brainard this week claimed a series of rate hikes and aggressive balance sheet runoff would help to quickly correct monetary policy imbalance and take the Fed to more neutral levels. The comments pushed the DXY Dollar Currency Index to a two-year high. 

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The dollar strengthens when rate hikes are expected. The DXY is a basket of currencies trading against the dollar. Weakness in currencies like the yen have contributed further to DXY dominance. 

Because Bitcoin trades inversely to the dollar, the ongoing rally in the DXY has also resulted in lower cryptocurrency valuations across the board. However, some relief could be due before the month is over. 

The TD9 sell setup has bee perfected on the monthly | Source: DXY on TradingView.com

The Dollar’s End And The Trend’s Impact On Bitcoin

According to the TD Sequential indicator created by market timing wizard Thomas Demark, the DXY monthly has perfected a series sell setup with a 9-count. After a specific sequence of candles reaches a 9-count, the indicator points out potential reversals in the making. 

A reversal at current levels would allow Bitcoin to continue its bull run. But trending assets can ignore a perfected TD9 setup. Breaking beyond the current resistance level here for the DXY could also send Bitcoin plummeting below support. 

Opposing bear and bull divs appear on the DXY (left) and Bitcoin (right) | Source: BTCUSD on TradingView.com via Moe_Mentum

Much like Bitcoin’s trend took a pause for some consolidation, even a trending DXY must slow down eventually. If that time isn’t now with the TD sell setup, what else might cool down the greenback?

Two of the hottest topics at the recent Bitcoin conference were inflation, and the petrodollar’s dominance globally. If inflation in the US reduces the buying power of US dollars, then so does any capital parked in USD during the rate increase-related downtrend in assets over the last several months. 

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The dollar’s global reserve status is also at very real risk. Among the many systems designed to keep the dollar in power is tied to oil trade. The petrodollar system means countries abroad must keep a supply of dollars on hand to trade oil in the global reserve currency. Oil-producing countries, however, are for the first time considering doing business in rubles or yuan to reduce dollar dominance around the globe. 

Will the DXY make it though resistance and send Bitcoin to a capitulation low, or will this TD9 sell setup potentially signal the end of the dollar’s reign?

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Featured image from iStockPhoto, Charts from TradingView.com