As the summer season begins, the financial markets are experiencing an unexpected heatwave in the form of the U.S. Dollar Index (DXY). Since late April, the DXY has been on an unprecedented uptrend, reaching levels unseen since the banking crisis in early March. This surge in the dollar has raised concerns among market participants due to its high inverse relationship with Bitcoin (BTC).

When the dollar rises, BTC falls and vice versa. The year-to-date performances of DXY (blue line) and BTC (orange line) underscore this relationship. Bitcoin’s 2023 performance has been propelled by a downward dollar. Not coincidentally, the DXY reached its year-to-date low near 100.80 on April 13, nearly the exact date BTC reached its year-to-date high of just over $31,000. Since then, however, both have been trending in opposite directions.

Feelings of unease over what sort of summer could be in store for markets should the dollar’s uptrend continue are certainly justified at present. After all, the last time the DXY broke above these levels, BTC was trading below the $20,000 mark.

Divergent Signals Indicate the Dollar Rally Could be Nearing an End

Although the DXY’s recent strength has been due to plummeting federal funds futures, there are some divergent signals that suggest this dollar rally could be nearing an end. The federal funds futures represent the terminal rate, or the market’s expectation of when the Federal Reserve’s hiking cycle will come to an end. When Federal funds futures fall, the terminal rate rises, and consequently, the dollar rises as well. The opposite is also true, which is another inverse correlation.

Currently, the federal funds futures read 94.83, implying a terminal rate of 5.27%. This suggests that the market still anticipates the Fed to hike rates by at least 27 basis points beyond its current rate of 5%. This is the lowest level federal funds futures have reached since early March, just before the banking crisis unfolded.

If the federal funds futures were again to fall back below the 94.50 level, as they did in March, it would become very likely that the market would fall back under heavy sell pressure due to this correlation. Notably, these federal funds futures made a strong surge on the afternoon of Wednesday, May 31, when they rose over 10 basis points from the lows.

Should this trend continue and the ZQN2023 contract rise back above 95, it would signal the market’s belief that the Fed’s hiking cycle has concluded, potentially paving the way for rate cuts. Such easing of monetary policy would more than likely be quite bullish for BTC and bearish for the DXY.

This is especially true if the DXY falls back down to new 2023 lows from here and breaks below its long-held support level near 100. Such price action would open up the gates for BTC to make a refreshed run above $30,000.

Bitcoin whales, classified by wallet addresses that hold more than 10,000 BTC, are the largest players in the Bitcoin market. As shown on the chart below, Bitcoin whales (represented by the red dots) have been steadily increasing their holdings on net every day since April 17, a trend which coincided with Bitcoin reaching its year-to-date high above $31,000.

This behavior diverges from previous trends, where whale wallets accumulated Bitcoin at market bottoms, or on the way to higher highs, rather than tops. This anomaly prompts a thought-provoking question: Have these whale wallets bought the top for the first time, or was April 17 not the peak?

This behavior from the Bitcoin market’s largest players calls into question the legitimacy of May’s DXY pump and adds uncertainty to bearish outlooks, especially when combined with the notable rise in federal funds futures.

For the remainder of the second quarter, it will be crucial to closely monitor the movements of terminal rate expectations, the DXY and Bitcoin whale activity, as these data points are likely to provide actionable clues prior to the next big move happening.


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