BTCUSD has a lot of room to catch up with the DXY

Bitcoin traded above $68k in November 2021 in what seemed to be a massive squeeze higher. But the enthusiasm quickly faded. 

In a little more than one year, hodlers saw their patience put to the test. The leading cryptocurrency fell back to earth, trading below $20k and triggering massive liquidations in many parts of the cryptocurrency industry. 

Plenty of factors have contributed to the “crypto winter” we’ve seen lately, such as the ongoing dollar’s strength as a result of the Fed’s tightening cycle. Yet, the Fed’s policy and the dollar’s strength might support Bitcoin’s recovery in the months ahead. 

BTC/USD weakness was too extreme

The Federal Reserve, like other major central banks in the world, raised the interest rates to fight inflation. So naturally, the US dollar strengthened as the tightening cycle was one (still is) of the steepest ever. 

The dollar gained across the FX dashboard – and against cryptocurrencies too. However, a simple comparison between the DXY gains and the BTC/USD weakness shows that Bitcoin’s weakness was too extreme. 

BTCUSD chart by TradingView

The daily chart above shows both the DXY and the BTC/USD exchange rate and how the two performed in a little more than 13 months. While the DXY gained about 20%, the BTC/USD exchange rate dropped more than 75% from its 2021 highs. 

Therefore,  the current bounce might be just the start of a stronger move higher for the BTC/USD exchange rate. In other words, the exchange rate has a lot of room to catch up with the dollar index. 

Deteriorating US outlook

While the Federal Reserve will still hike at its upcoming meeting, the US outlook is deteriorating fast. At this pace, one might expect a recession in the year’s second half and, thus a reverse in the Fed’s policy. 

A deteriorating outlook for the world’s largest economy would spell trouble for the US dollar. Given the BTC/USD reaction to a strong DXY, then the exchange rate might rally even more as the dollar index corrects. 

All in all, Bitcoin looks well-positioned to take advantage of the upcoming dollar weakness. The more the DXY falls from its highs, the stronger the BTC/USD rally will be.