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| By Alex Benfield |
There are few more important factors in markets than the strength of the U.S. dollar and the monetary policy of the Federal Reserve. That was apparent in 2022 when the U.S. Dollar Index (DXY) blasted off to new heights not seen in years.
Paired with a Fed that was hell-bent on raising rates to fight off runaway inflation, the surge in the dollar wreaked havoc on markets, especially risk asset markets like cryptocurrencies.
The strength of the dollar took its toll on Bitcoin (BTC, Tech/Adoption Grade “B+”). After all, most cryptocurrency pairs are measured against the U.S. dollar. Think of BTC/USD as a fraction: If the numerator, BTC, rises, the fraction increases. Should the denominator increase, the fraction shrinks.
The dollar as measured by the DXY rose for the first three quarters of 2022. In turn, most markets retreated during that time. In September 2022, the DXY began to correct from a height of almost 115 down to 101.
However, since the start of last month, the DXY has been on the move again. Now, it's started to affect other markets.
Additionally, last month’s U.S. inflation data came in hotter than expected. That has many investors worrying that the Fed may raise rates higher than the expected 25 basis points.
In fact, it appears that the market has now priced in a 50-basis point hike. The Fed funds rate has been decreasing since November, and a 50-bps hike would change that trend in a significant way.
If the Fed actually hikes rates by 50 bps, it will show that we are not past the inflation worries that have been plaguing markets for over a year now. Investors are starting to rationalize the reality that higher rates may be here for longer than initially expected.
Now, the crypto market has been red for a few days, but that is more likely because we were overdue for a correction than the surge in strength from the DXY.
However, given these changes in our expectations from the Fed, the U.S. dollar strength and the recent fear, uncertainty and doubt surrounding crypto banking regulations in the U.S., the month of March may not be too hot for crypto.
That does not change our outlook for the crypto market in 2023, though. We were expecting this correction, which we think could last until next month, and we are still predicting a rally to follow as we head into the second quarter of the year.
Do not get too caught up in the current narratives!
Bitcoin has broken below the orange uptrend line that had been supporting the rally since the start of the year. Overall, it is down a little over 12% from its high last month, meaning BTC may retest support at the $21,000 and $20,000 levels.
But those that think we may be heading for newer lows are simply too extreme. Many things have changed in the post-FTX crypto world; much of the filth has been washed out of the market along with weak-handed investors. The current worry about the monetary policy from the Fed won’t change that.
Expect BTC to find support between current levels and the $17,500 range it had been trading around right after the FTX implosion.
Click here to view full-sized image.
Ethereum (ETH, Tech/Adoption Grade “B”) has also fallen below its orange uptrend line after failing to break above resistance at $1,650. ETH is trading above its 200-week moving average, which is the first likely target to the downside.
Below that there should be support around $1,300.
That 200-week MA line will be a very important level to watch out for, because if ETH can hold above that level throughout this correction, it would strengthen the case for the rally that we expect to follow.
Click here to view full-sized image.
What’s Next
We will likely continue to see some bearish narratives that develop over the next few weeks, but we need to zoom out and focus on the bigger picture: Crypto is just now waking up after a rough bear market in 2022, and a correction was always going to follow its breakout rally.
This is normal market behavior.
Don’t get me wrong — the news out of the Fed and the surge in the DXY are important to track. Additionally, the regulatory crackdown in the U.S. could have some big impacts on the market. However, this market is still undervalued following last year's overblown bearish price action.
Let’s keep an eye on our support levels and watch how this plays out.
Best,
Alex
