EUR/USD and crypto market

Week by numbers

The past week has seen no clear trend in the crypto market. The price of the largest cryptocurrency bitcoin increased by 0.3 percent, the second largest cryptocurrency ether decreased by approximately 0.7 percent and the total value of the rest of the crypto market decreased by approximately 0.8%.

With both price changes and the differences between them being small, both  ETH/BTC ratio and bitcoin dominance remained virtually unchanged.

During an overall somewhat dull week, considerable price movements were seen in individual tokens. Among the tokens of the Kvarn X trading service, the strongest price increases were seen in Uniswap's UNI token (+18%), Chainlink's LINK token (+14%) and Aave protocol's AAVE token (+9%). On the other hand, the biggest price declines were Hedera's HBAR (-9%), Maker's MKR token (-6%) and The Graph protocol's GRT token (-5%).

In a slightly longer-term view, the last week can be seen as a continuation of the sideways movement that has already lasted for about ten weeks, following the strong price rise at the beginning of the year. The price of the largest cryptocurrency, bitcoin, has been sailing roughly between $59,000 and $72,000 without a clear direction.

After such a long consolidation phase, it could be expected that the crypto market might take a more clearly discernible direction in the near future. We will focus nex on whether this direction is more likely to be up or down.

Crypto market's next move?

As stated above, for the last 2.5 months, cryptocurrency price have seen back and forth movement without a clear direction. It seems quite difficult to assess the next direction of the market purely from the price movements. For that, perhaps our best clue is that the price of bitcoin is still above the twenty-week moving average, which is often considered an uptrend sign. Therefore, it could be justified to think that the uptrend is still in place. However, the margin to the 20-week moving average is no longer very big, only a little over ten percent.

This time we look at the bull market of the last year and a half from a slightly different angle, through the lens provided by the relationship between the euro and the US dollar.

If we put the dollar exchange rate of bitcoin and the EUR/USD ratio on the same graph, we can see that the strong upward movements of the bitcoin bull market have generally occurred when the EUR/USD ratio has been on uptrend. During the downtrends in the EUR/USD ratio, the bitcoin price generally moved sideways or dropped slightly.

The only clear exception to this rule came at the beginning of February, when the Bitcoin rate turned to a steep uptrend a couple of weeks before the corresponding turn in the EUR/USD ratio. We assume that the catalysts for this deviation can be found in the opening of Bitcoin ETF funds, the capital inflows they collected and/or the exceptionally positive market sentiment they caused.

On the other hand, if we look at the uptrends of the EUR/USD ratio during the bear market 2021-2022, we can see that they often coincided with a slightly gentler decline or even small bear market rallies. The strongest downward movements of the bear market were often seen when the EUR/USD ratio was also in a downtrend.

The biggest exception to this bear market pattern was in October-November 2022, when the EUR/USD ratio was on a sharp rise, and at the same time the Bitcoin course plunged sharply downwards. We attribute this anomaly to the collapse of the infamous crypto exchange FTX. This interpretation of a crypto-specific market disruption is supported, among other things, by the fact that the Nasdaq index, representing another high-risk asset class similar to cryptocurrencies, technology stocks, moved upwards in line with the EUR/USD ratio at the time.

If the reader has been convinced by this point that the direction of the change in the EUR/USD ratio might be worth taking into account when evaluating expectations regarding the crypto market, we would like to make two side remarks.

First, the intention is not to say that the strengthening of the euro against the dollar actually causes the price of cryptocurrencies to rise. We believe it is more about correlation. The EUR/USD ratio often acts as a market indicator, and tells about changes in e.g. in their willingness to take risks.

Second, it may be useful to think that while it is possible to think of a rise in the EUR/USD ratio as a strengthening of the euro, perhaps it is more useful to think of it as a weakening of the dollar. The US dollar has traditionally been an economic safe haven, and as risk appetite increases, dollar weakens not only against the euro, but also against higher-risk asset classes such as stocks and cryptocurrencies.

After these side notes, we can look at the near-term outlook for the EUR/USD ratio.

From the graph, we can see that EUR/USD has just made both a new “lower high” and “lower low”, and at the same time it has sunk below its ten-day moving average, unable to rise back above it. The resolution of the situation can be considered to be still ongoing, but we see a significant possibility that we are witnessing the beginning of a downward trend in the EUR/USD ratio.

At the same time, the price of bitcoin has sunk below its ten-day moving average, managing to rise back above it. However, it has also formed two "lower highs" and "lower lows" recently.

If the hypothesis of the beginning of a downtrend in the EUR/USD ratio were true, what could it mean for cryptocurrency prices?

Based on the previous downtrends in EUR/USD, we would consider the probability of large upward movements to be lowered. No scenario is completely impossible, but we would consider a continuation of the sideways movement or a downward movement as the most likely one. In that case, it would be worth keeping an eye on staying above the 20-week moving average, as it gives indications of a possible continuation or break in the longer-term uptrend. Moderate moves to the upside are possible, but we find it quite unlikely that breaking all-time high of around $74,000 would be seen up during the downtrend in EUR/USD.

In terms of duration, the downward trends in the EUR/USD ratio seen during this bull market have generally been around five to around ten weeks. In the early summer of 2023, the short downward trend lasted throughout month of May, and the next slightly longer one from mid-July to early October.

Finally, we make two more side remarks. There is still no full certainty about the start of the EUR/USD downward trend, even if, according to our interpretation, the early signs point to it. Second, there is no guarantee that the positive correlation between EUR/USD and BTC/USD will remain, although this has often been the case.

We will keep on monitoring the development of the EUR/USD ratio and its possible impact on the crypto market in our upcoming Pulse newsletters, so stay tuned!

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