The breathtaking Bitcoin (BTC) price rally has hit a snag as it approaches the crucial $90,000 resistance level identified by CoinDesk last week. The leading cryptocurrency’s ascent has been nothing short of spectacular, with prices surging $20,000 in a single week to shatter previous all-time highs. However, the euphoria seems to have cooled off, at least momentarily, as BTC takes a breather near this key threshold.
Market observers suggest that such a pause is entirely normal after an explosive move like the one witnessed in Bitcoin. These consolidation periods often serve to recharge the bulls’ engines before the next leg up. In fact, crypto traders in the options market are positioning themselves for a potential breakout to the $110,000-$120,000 range, as per data shared by QCP Capital.
Forex Traders Bet on Dollar Strength
Interestingly, Bitcoin’s rally stalled just as forex traders began betting on continued strength in the US Dollar Index (DXY), which tracks the greenback’s value against a basket of major fiat currencies. Since Donald Trump’s victory in the US presidential election a week ago, both BTC and USD, part of the so-called “Trump trades,” have been on a tear. The DXY has climbed 2.7% to 106.78, hitting a six-month high, according to TradingView data.
However, persistent dollar strength could revive the historical negative correlation between the two assets and, at the very least, slow Bitcoin’s ascent, if not halt it altogether. As the world’s reserve currency, the USD plays a disproportionate role in global trade, international debt, and non-bank lending. An appreciating dollar typically causes investors with dollar-denominated debts and servicing costs to reduce exposure to riskier assets like stocks and cryptocurrencies.
Bond Yields Harden
Adding fuel to the dollar’s rise, US Treasury yields are also firming up, with the 2-year note yield climbing to 4.36% on Tuesday, the highest since July 31. The benchmark 10-year note has rebounded close to the multi-month high of 4.46% seen a week ago.
Market moves likely reflect concern that President-elect Donald Trump’s policies, particularly mass deportations, could generate inflation, making it harder for the Federal Reserve to cut interest rates next year. As TS Lombard’s CEO of global macro Dario Perkins points out, strong immigration has been one of the key factors allowing central banks to be more relaxed about underlying price dynamics post-COVID. Reversing this trend by sending millions back to their home countries could recreate the tight labor market conditions seen two years ago.
Tightening Financial Conditions
The combination of a stronger dollar and rising bond yields points to a tightening of financial conditions, which could weigh on risk assets like Bitcoin. Looser financial conditions, characterized by a weaker dollar and lower yields, have been a key driver of the post-pandemic bull market in stocks and cryptocurrencies.
“All we would say here is don’t fight this nascent dollar bull trend,” cautioned ING in a note to clients on Tuesday, highlighting the potential for a shift in market sentiment.
– ING
For now, crypto traders remain optimistic, with many seeing the current pause as an opportunity to load up before the next leg higher. The options market is pricing in a move to $110,000-$120,000, suggesting that the bulls are far from throwing in the towel.
A Battle of Two Heavyweights
The stage is set for a captivating battle between the world’s reserve currency and the king of cryptocurrencies. Will the greenback’s strength stifle Bitcoin’s ascent, or is this merely a pitstop on the road to even greater heights? As the saying goes, “The trend is your friend until it ends,” and for now, both the dollar and Bitcoin remain in bullish territory.
However, with the specter of tighter financial conditions looming, the question on everyone’s mind is whether Bitcoin can maintain its momentum in the face of a resurgent dollar. The coming weeks and months will be critical in determining the trajectory of this fascinating tussle between two heavyweights of the financial world.
As always, market participants will need to stay nimble and adapt to rapidly changing conditions. While the long-term outlook for Bitcoin remains bullish, with many calling for a move to $100,000 and beyond, the short-term picture is clouded by the dollar’s unexpected strength and the potential for a more hawkish Federal Reserve.
One thing is for sure: the cryptocurrency market never fails to deliver drama and excitement. Whether you’re a seasoned trader or a casual observer, the unfolding battle between Bitcoin and the dollar is sure to keep you on the edge of your seat. So buckle up and get ready for a wild ride as two of the world’s most powerful financial forces collide head-on!
