Bitcoin (BTC) is about to complete a 69.81% correction just as it did back in October 2014. What remains to be seen now is whether Bitcoin (BTC) will follow the exact same pattern as in 2014 or trade differently. The above monthly chart for BTC/USD shows that even the EMA alignment in both cases is the same. The lower half of the above chart shows a chart for EUR/USD which demonstrates the striking similarities between strength of the EUR/USD pair and Bitcoin (BTC). The price of Bitcoin (BTC) benefited from a weak dollar and dovish FED policies in the beginning, but with Janet Yellen as the new FED chair and a drastic change in FED policies, the price of Bitcoin (BTC) tumbled hard in 2014 as the US Dollar (USD) strengthened. This is demonstrated by a decline in EUR/USD on the above chart, around the same time.
It would not be wrong to say that Bitcoin (BTC) has only danced to the tune of the Greenback (US Dollar) so far and has made little to no moves of its own. During times when the dollar is strong or expected to remain strong, we see a decline in Bitcoin (BTC) prices. Similarly, when the EURO climbs up against the US Dollar, we see a rise in the price of Bitcoin (BTC). Hawkish FED policies during early 2018 seem to have had a greater impact on the price of Bitcoin (BTC) than CME or CBOE Futures. The Federal Reserve pursued an aggressive tightening policy since the beginning of the year and has already raised interest rates twice in 2018. Two more hikes are expected for this year, one in September and another in December.
There is a 96% chance of an interest rate hike in September according to CME’s FedWatch Tool. In light of recent developments, it does not seem likely that the FED would push for a rate hike later this year but the rate hike in September seems likely so far even amid concerns of an escalating trade war. President Trump recently said in an interview that he is not thrilled about Fed Chair, Jerome Powell’s rate hike in September.
However, Fed Chair Powell has clearly stated that more rate hikes is the best way to protect a recovery and that interest rate hikes will be pursued come what may. If there is an interest rate hike in September as expected, investors can expect money flowing out of non yielding assets like Bitcoin (BTC) into yielding assets like floating rate bonds, dividend paying stocks, or simply into bank accounts. The FED seems to be fighting an economic war on multiple fronts. On one front, there is China with which President Trump started a trade war which if escalates further would put immense pressure on the FED and could stop them from pursuing rate hikes. On another front are countries like Russia and Iran threatening to dump the US Dollar (USD). On another front is Wall Street, definitely not thrilled about an interest rate hike as it would make borrowing costly and would thus bring growth in the stock market to a standstill.
If the circumstances were different, a rate hike at this point would have been a done deal and we would be looking at the above monthly chart for BTC/USD as a sure thing. This chart shows the full extent of a correction Bitcoin (BTC) could undergo before the beginning of a new cycle. This would be an 86.41% correction that would extend all the way to September 2019. In order for this extended correction to set in motion, the price would have to break the 21 EMA, but still remain above the 50 EMA. This correction would drag the price of Bitcoin (BTC) just below $3,000.
Trends on larger timeframes do not change often and if nothing much had changed, there would have been a much higher probability of this extended correction being followed. However, given the fact that the US Dollar (USD) is probably at its most crucial stage since Nixon took us off the gold standard, it is reasonable to assume that this time could really be different and that Bitcoin (BTC) may take off from these level without going through an extended correction as before. However, the probability of this scenario coming into play still remains high until invalidated and any trade, long or short should be placed with extreme caution.