Not good for Bitcoin: US dollar is rebounding from multi-year support

The United States dollar has started to rebound from a multi-year support level. Simultaneously, the prices of both Bitcoin (BTC) and gold have both dropped off.

Additionally, the European Central Bank’s (ECB) warning against the appreciating euro is further catalyzing the dollar’s rally.

ECB looks to weaken the euro as the dollar just begins its recovery

Bitcoin and gold prices respond negatively to the rising dollar because markets price both assets with the dollar. If the dollar value goes up, the value of BTC relative to the dollar goes down.

Since the dollar increased from its monthly open on Sept. 1, the price of Bitcoin declined from $12,086 to as low as $11,160. Gold has seen a similar response, declining by nearly 1.8% in the past two days.

The daily chart of the U.S. dollar index with key levels. Source: Trader XO

In the near term, analysts generally anticipate the dollar’s momentum to strengthen. This week, the ECB said it would look to offset the rising euro by controlling exports and encouraging more monetary stimulus. 

Currency analysts believe the ECB could continue to “dampen” the strength of the euro. In the short term that could cause the dollar to rally, which might place selling pressure on Bitcoin and gold. MUFG analyst Lee Hardman said:

“Overall the comments suggest that an immediate policy response from the ECB to help weaken the euro appears unlikely, and they will rely more on jawboning to dampen euro strength for now.”

But FX strategists predicted the euro to slump against the dollar after an initial upsurge. In a note to clients, Arkera global macro strategist Viraj Patel said the euro is nearing the “pain threshold” of policymakers.

If the euro rallies further, Patel suggested that a strong reaction from the ECB is likely. Since then, the ECB has warned against the rising euro on multiple occasions.

Whether the trend of the recovering dollar and the fading euro would continue remains uncertain. There is a possibility that both the euro and the dollar fall simultaneously.

For now, considering the strength of the dollar’s rebound, Bitcoin traders are turning cautiously bearish. 

What Bitcoin traders believe would happen in the near term

According to Michael van de Poppe, a full-time trader at the Amsterdam Stock Exchange, Bitcoin could move back to $11,600 if $11,200 support levels hold.

A potential short-term Bitcoin price scenario. Source: Michael van de Poppe

Since Aug. 26, for well over a week, the $11,200 level has served as a key support area for Bitcoin. Poppe wrote:

“First important pivot couldn't provide a breakthrough, so we'll be testing the lows again. If these hold -> another test and possible rally towards $11,550-11,700. If breakdown, I'd be targeting $10,600-10,800.”

Trader XO, a pseudonymous trader who trades cryptocurrencies and FX markets, said the dollar reclaimed a “huge” monthly level. If the dollar index rallies to the next resistance at over 94.5 points, it might cause the momentum of BTC to slow. The trader said:

“Daily bullish pin bar printed on Tuesday and price has broken through the down trending channel Price also reclaimed a huge monthly level Will continue to look for eurusd shorts and long dollar pairs As for BTC - no comment.”