The US dollar index hit a 20-year high. Where will the price of Bitcoin go?

Cryptocurrencies are still suffering from a broad sell-off in risk assets after the Federal Reserve stepped up its hawkish comments on the inflation outlook. Bitcoin price action has returned to the sub-$20,000 region, with traders and analysts expecting a retest of this year’s June lows.

While all is calm at the Fed for now ahead of its September rate hike decision, there is still a lot of unease as geopolitical uncertainty and inflation persist, and investors are wondering where BTC/USD might be headed in the coming days.

Spot price triggers $18,000 target

BTC/USD ended August 28 with a sharp sell-off, resulting in the lowest weekly close since early July. Analyst sentiment is understandably less optimistic in the short term.

"Hopefully we'll see a recovery this week, but the way stocks closed on Friday it doesn't look that great," trader Josh Rager summed up to his Twitter followers in a weekend update.

Still, popular crypto trading account Il Capo noted the possibility of a brief squeeze to the upside before continuing the downtrend. Noting that negative funding rates mean that derivatives markets tend to see outright losses, he predicted that $23,000 could reappear first.

He wrote on Twitter, "There are far more people expecting $19,000 than $23,000. The funding speaks for itself. Also, there is a ton of liquidity above $21,000."

In response, trader Mark Cullen noted that traders are “adding more BTC short positions in the $20,100 to $20,300 area.”

Amid calls for $17,000 or lower, technical analyst Gert van Lagen gave a minimum target of $17,500 on the daily chart.

Meanwhile, TMV Crypto says $18,400 is an area to watch.

Traders prepare for further declines in U.S. stocks

The bombshell in Federal Reserve Chairman Powell's speech last Friday sent shock waves through global risk assets.

According to one statistic, Powell's 8-minute speech evaporated more than $2 trillion from global stock markets, of which $1.25 trillion was evaporated from the US stock market alone.

Powell said, "At some point, with the stance of monetary policy tightened further, it may become appropriate to slow the pace of interest rate increases."

Speaking on Bloomberg TV, Paul Christopher, head of global market strategy at Wells Fargo Investment Institute, warned that U.S. stocks will fall further, with the S&P 500 set to fall below 4,000 next.

On the other hand, the July inflation peak already foreshadowed a macro low for stocks.

US dollar index hits 20-year high

A key factor in this week's stock market volatility continues to be the strength of the U.S. dollar.

As the U.S. Dollar Index (DXY) hit a 20-year high this week, the negative correlation between the U.S. dollar performance and risk assets has come into focus.

At the time of writing on August 29, these highs are still continuing, with DXY having reached its highest peak since September 2002 at 109.47.

Raoul Pal, founder of Global Macro Investor, responded, “If the dollar continues to rise, it will really spoil the situation.”

Michaël van de Poppe was equally shocked, calling this a “critical moment for the entire crypto market.”

The dollar’s ​​surge has also brought pain to major fiat currencies, most notably the euro, which quickly fell back below parity against the dollar on August 29.

The European Central Bank and the Bank of Japan have been reluctant to push for rate hikes like the Fed, causing inflation to continue to climb over the summer.

MVRV-Z indicator

The MVRV-Z score indicator, which started preparing analysts for a price bottom in July, has started to fall again, falling to its lowest level in a month.

MVRV-Z uses market capitalization and realized price to determine how close BTC/USD is to its “fair value.”

In July, it hit a potential BTC price floor of $15,600 while briefly exiting the buy zone before returning in the second half of August.

Data from on-chain analytics firm Glassnode suggests the realized price is now around $21,600.

"Extreme fear" returns

Perhaps unsurprisingly, Bitcoin’s fall below $20,000 caused its key market sentiment indicator to return to its most bearish level.

As of August 29, the Crypto Fear & Greed Index is back in “Extreme Fear” territory.

This year even saw the longest period of "extreme fear" on record, with an overall market sentiment score of just 6.

However, analyzing investor sentiment, on-chain research firm Santiment noted that a large number of investors are accumulating rather than divesting.

“As Bitcoin hovered around $20,000 over the weekend, a positive sign was the growth in the number of key whale addresses,” the agency commented on a chart from August. “There is a correlation between BTC’s price and the number of addresses holding between 100 and 10,000 BTC, which has risen by 103 in the past 30 days.”

Still, others believe there is still some way to go before cryptocurrency demand reaches a true macro turning point.