Investors predicting strong uptrends in the Bitcoin market may encounter resistance from a bullish US dollar outlook.
On Friday, the dollar rose slightly – and the Bitcoin price slid down – after it was revealed that Donald Trump and his wife Melania tested positive for Corona. Investors have been preparing for some time for widespread uncertainty surrounding the November 3 presidential election.
The US Dollar Index (DXY) remained stable after last week’s rally.
Trump had repeatedly hinted that he might challenge the poll results because of his fear of „election fraud. This raises expectations of excessive market volatility during the election season.
As a result, investors returned to the safety of what they consider to be the safest asset: the US dollar.
After falling for a while after its retreat from 94.74 (as shown in the chart above), the US Dollar Index found bullish momentum in the news of Trump’s coronavirus infection. And now the index is looking for similar bullish catalysts to continue its upward trend.
The euro is weak
Part of the short-term bullish distortion of the dollar resulted from a weakening euro.
Rising coronavirus infections in the euro zone have increased the possibility of a tighter lockdown. This was another reason why investors were hesitant to sell the US dollar against the euro.
Derek Halpenny, Head of Currency Strategy at MUFG, believes that the trend could continue until the US elections. It is unlikely that investors will sell their dollar holdings in order to participate in the risks of volatile markets.
In addition, the dollar is likely to continue its recovery if the U.S. Congress cannot finalize the second coronavirus bailout package for U.S. households, businesses and the unemployed. This would limit the dollar’s liquidity, which in turn would make it more attractive to investors due to the shortage.
Miles Ruttan, co-founder and chief economic strategist of Bytown Capital, estimates that too uncertain a period before the election could pose a risk to long-term risk-averse investors. Therefore, any dollar gains would mean that people would rush to cash to cover their margin calls.
They would then create a self-reinforcing deflationary dilemma. It is „a situation where institutions and traders sell because they have to, not because they want to“.
Bitcoin against US Dollar
The better outlook for the U.S. dollar could mean that Bitcoin has a contrary market orientation. This is due to the growing inverse correlation between the two – mainly following the global market routine in March 2020, when the US Dollar index rose by 8.81 percent, while Bitcoin fell by almost 60 percent.
Bitcoin consolidates at over $10,400-10,500 in support.
At the same time, Bitcoin’s positive correlation with the US equity and gold market increased. Jason Brady, President and CEO of Thornburg Investment Management, explains: It guesses/advises customers to hold cash in order to protect itself against a further sellout as in March. Brady:
„You can turn cash into anything, but you can’t turn everything into cash.“
So it seems that Bitcoin is in danger of falling further before the election season.