DXY Drifts Lower, Breaking Crypto Downtrend

Bitcoin surged on Friday breaking back above the $20,000 mark as the USD weakened and stocks jumped. Other digital coins rallied too, including Ethereum which was up around 5%. The total cryptocurrency market value has jumped back above US$1 trillion again. Let’s look at what’s driving the market…

The DXY index lost ground for the fourth session in a row and extends further the corrective downside after last week’s 20-year peaks well north of the 110.00 mark. The move lower in the dollar comes in tandem with a small downtick in US yields across the curve.

The index has embarked on a corrective path that has already broken below the key support at 108.00 at the beginning of last week. The direction of the index will rely largely on US inflation figures which are set to be released today. Financial markets are hoping to see signs of cooling inflation when the U.S. Consumer Price Index. The report is expected to show the rate of price increases in August slowed from July’s elevated rate, reflecting softness in the prices for gasoline, airfares, hotels and used cars, though food prices were higher.

Investors are also keeping an eye on signals about the Fed’s rate hike path. While the Fed has suggested that it will continue to raise interest rates, the market appears to believe that improved inflation data may result in the Fed pivoting sooner. Risk on markets tend to bottom after the Fed begins to cut rates…

While the relationship between returns on US stock markets and changes in the value of the dollar is statistically weak historically, data does show a higher correlation between the volatility of returns on risk on assets and the volatility of dollar exchange rates – particularly in recent months.

We are in a period of economic uncertainty, which is feeding the US dollar's strength. Large amounts of assets has being moved by institutional investors, like banks and retirement funds as well as retail investors. They're all looking for a relatively stable place to park that money – the US Dollar.

Additionally, the sheer amount of dollar debt that exists outside the United States domestic economy due to the dollar's world reserve currency status is the reason that global economic slowdowns and a strengthening dollar come hand in hand.

If we begin to see inflation figures easing globally, the market will begin to regain confidence. This will lead to institutional investors freeing up some of their USD holdings, decreasing the strength of the DXY. There's a chance that today's inflation figures may be a change in market trends – a move away from extreme fear, toward confidence.

The temporary relief in the strength of the USD over the last few days has allowed markets across the board to rally. Bitcoin and Ethereum have drawn strength from this weakness. Pair this with Ethereum’s potentially historic shift to a “proof-of-stake” system that’s supposed to be 99% more energy efficient than the current “proof-of-work” system that Bitcoin uses. "The Merge" is set to occur on Thursday. Pair this with a macro accumulation over a multi-year scale for Ethereum and the outlook long-term remains positive.

Ethereum is approaching a key resistance level of US$1,800. Should today’s inflation news be positive, risk-on markets may continue to rally. All eyes are on the USD!