This year has seen top cryptocurrencies bitcoin (BTC) and ether (ETH) rally with a 70% surge and 56% gain respectively, trouncing traditional risk assets. However, Singapore-based QCP Capital suggests that good news could grind to a halt if the heavily shorted U.S. dollar experiences a short squeeze. This rally would be a result of an unwinding of bearish bets and could have negative consequences for numerous cryptocurrencies.
QCP Capital highlights that the most significant threat to cryptocurrencies currently is the USD. If a short squeeze takes place, this could result in BTC, ETH, and gold plummeting. Historically, bitcoin has tended to move in the opposite direction to the dollar index. As the negative correlation between them intensifies, a short squeeze in USD could have a notable impact on both the leading cryptocurrency and the overall market.
To put this into perspective, shorting refers to taking bearish bets on the price of an asset. When the heavily shorted asset increases in value, bears with open short positions are forced to buy back the asset to prevent losses. As a result, this adds pressure on upward pricing. The dollar index has already fallen over 13% from last year’s peak on the premise that the Federal Reserve could shift away from increasing interest rates. Hedgers are now taking bets against the dollar to the tune of $12.2 billion.
This short squeeze might come to fruition on the off chance that Federal Reserve Chairman Jerome Powell maintains a data-dependent policy stance. Such a move would contradict market predictions of a dovish pivot that would see renewed rate cuts. While the Fed funds futures expect a further rate hike in the near future, a return to rate cuts is anticipated from July onwards.
Technical analysis also identifies the dollar index’s bullish “double bottom” pattern, highlighting its resilience against similarly low price levels. As momentum builds with positive divergence in RSI and MACD, a break higher in USD could lead to a sharp correction in the cryptocurrency market. With the current status of the relationship between the USD and major cryptocurrencies, it is crucial to keep a keen eye on the market’s movements and reactions.