Since mid-September, the dollar index has been on a downward trend and has fallen by around -10%. In question, a slowdown in inflation and therefore potentially in the monetary tightening imposed by the American Federal Reserve (FED). Is this a sign of a bullish rebound for Bitcoin (BTC) and other cryptos?
The dollar index (DXY) in freefall
Two months after reaching its highest peak at 114 points, the Dollar Index continues its bearish phase. This index, which tracks the price of the dollar against a basket of six other currencies, fell about 9%. It is currently evolving at 104 points, its lowest since June.
The fall in the dollar index since mid-September
This decrease is primarily due to the reversal of inflation in the United States. In October 2022, consumer prices rose 7.7% year-on-year, down from 8.2% in September and a record 9.1% in June. In other words, inflation appears to be easing.
Secondly, the Chairman of the American Federal Reserve (FED), Jerome Powell, announced on Wednesday that rate hikes would be smaller in the future. As a reminder, this corresponds to the interest rates paid by commercial banks to the Federal Reserve to borrow money (and therefore invest in the markets).
As you will have understood, the higher the FED rates, the less banks want to borrow to invest. Risky markets (equities or cryptos) fall and safe havens (gold or dollar) rise. If these rates decrease, then we should expect the opposite phenomenon.
Some believe that inflation in the United States has peaked and that the Fed’s monetary policy should ease in the future. In other words, they take the opportunity to get out of safe havens like the dollar (explaining the fall) to expose themselves again to risky markets (cryptocurrencies, for example).
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A sign of a rebound for cryptos?
It is undeniable that the cryptocurrency market is dependent on the macro-economic context. The Covid crisis and the Russian-Ukrainian conflict have proven it: cryptos are not escaping for the moment to their status as risky assetsalthough Bitcoin (BTC) wants to be a safe haven.
In this direction, a slowdown in monetary tightening imposed by the FED for several months (to cope with inflation) could therefore mean a return of liquidity to risky markets such as cryptocurrencies. In any case, this is what many investors expect.
A top of the dollar index and a weakening could be the sign of a low point in Bitcoin and a strong comeback. Especially since the fundamental data, highlighted by the on-chain analysis of our expert Prof. Chain, show that the capitulation is near and that bitcoin is highly undervalued.
Is this really the case? This is a debate that divides analysts. On the one hand, some confirm the analysis explained above, while others invalidate it. For the latter, the fall of the dollar index is only a retracement which will allow an even stronger upward trend.
Indeed, inflation is down but the numbers are still extremely high. The United States had not experienced such a rise in consumer prices since 1982. To really reverse the trend, the FED will certainly have to continue its rate hike policy.
As a result, the dollar index should probably rise again and the price of Bitcoin wait a little before experiencing a new bullish movement.
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Journalist for Cryptoast, I strive to dissect every detail of the exciting world of cryptocurrencies and make it accessible and understandable to as many people as possible.
Lilian Aliaga
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