- The US dollar index has major implications for major assets like Bitcoin and stocks.
- The DXY index has been in a strong bearish trend in the past few weeks.
The US dollar index (DXY) continued its bearish trend this week even after the relatively impressive US GDP data. The DXY index plunged to a low of $101.63, which is about 11.60% below its highest point in 2022. It is now hovering near the lowest point in June last year as focus shifts to the upcoming Fed decision. This price action has an implication for Bitcoin prices and beyond.
Why is the DXY index plunging?
The US dollar and the VIX indices have been in a strong downward trend in the past few months. This decline accelerated after the US started to publish relatively weak consumer inflation data. According to the Bureau of Labor Statistics (BLS), the headline consumer inflation dropped to 6.5% in December, the sixth straight month of decline.
Another report published on Thursday showed that the headline Personal Consumer Expenditure (PCE) declined from 4.3% in Q3 to 3.2% in Q4. Core PCE, which excludes the volatile food and energy products, declined from 4.70% to 3.90%. This is an important number since it is the Fed’s favorite gauge for inflation.
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At the same time, the number of layoffs have been continuing. Companies like Salesforce, Twitter, Microsoft, and Alphabet have laid off thousands of people in the past few months. Together with banks, many companies have warned about an impending recession.
Therefore, analysts believe that the Fed will continue its pivot in the coming months. This could include slowing the pace of rate hikes or even pausing hikes completely. Some analysts believe that the Fed will actually slash rates in Q4 as the economy moves into a deflation.
US dollar index and Bitcoin prices
There is a close relationship between the DXY index and Bitcoin prices. In fact, one way to predict where Bitcoin is heading is to look at the performance of the greenback. In most cases, Bitcoin tends to rise when the US dollar index is crashing. For example, in 2022, Bitcoin price plunged by more than 70% as the US dollar surged to the highest level in 20 years.
Turning to the daily chart, we see that the US dollar index has been in a strong bearish trend in the past few months. It has managed to cross below the key support level at $103.57, the lowest point on December 14. Also, it has moved below the 50-day and 25-day moving averages while the Relative Strength Index (RSI) has continued falling.
Therefore, it will likely continue falling as sellers target the key support at $100. If this happens, it means that Bitcoin price will likely continue rising and possibly retest the resistance at $25,000.
