Bitcoin (BTC), and ether(ETH) are the two top cryptocurrencies in terms of market value. They have risen by 70% and 56% respectively this year. This is a huge leap over traditional risk assets.

According to Singapore-based options-trading firm QCP Capital, however, the good times could end if the heavily-shorted U.S. Dollar, which recently found a price floor of “double bottom”, sees a squeeze, a rally powered a unwinding bearish bets.

The biggest obstacle to crypto is the USD. We believe the market has been heavily positioned on the short side, and could be vulnerable to a “short squeeze”, which would cause BTC/ETH or gold to fall.

Bitcoin has historically moved the opposite way to the dollar index. has recently strengthened the negative correlation between them. This means that a short squeeze on the dollar could affect the market and the leading cryptocurrency.

Shorting is the act of betting against an asset. Short squeezes occur when an asset heavily shorted moves higher and forces bears to close their open short positions. This, in turn adds upward pressure to prices.

Dollar index peaked at 114.78 last September and has dropped over 13% in the past year on the hope that the Federal Reserve would abandon interest rate increases. Data from the Wall Street Journal sourced by Scotiabank shows that hedge fund managers bet against the dollar reached $12.2 billion on April 25, according to Scotiabank.

Will the dollar experience a short squeeze in price?

If Federal Reserve Chair Jerome Powell continues to maintain on Wednesday a data-dependent stance, the greenback may be squeezed short. This would contradict markets that were positioned in anticipation of a so called dovish pivot favoring renewed rate reductions.

The pivot has been fully priced into the Fed’s pricing. The U.S. debt ceiling, banking crisis and recession are the betas for the [U.S. Dollar] going forward. We believe the USD’s 12% decline is pricing in more pessimistic scenarios for these three, and we believe this makes it ripe to a short-term pressure,” QCP’s team told CoinDesk.

The CME FedWatch Tool shows traders expect the Fed will deliver its final rate hike of 25 basis points later Wednesday, and then resort to rate reductions from July. The Fed began its tightening cycle last March, which caused a ruckus in risk assets, including cryptocurrencies. Since then, rates have been raised by 475 basis point.

Double bottom in DXY

The dollar index rose two weeks ago from levels near its February low, 100.82. This confirmed what is called the bullish “double bottom” pattern in technical analyses.

(TradingView/CoinDesk) The DXY recently found a bottom. (TradingView/CoinDesk) (TradingView/CoinDesk)

Patterns show that buyers held firm twice in the same area. This created a floor to allow prices to rise.

QCP’s insights department said: “We are noticing a positive divergence between RSI, MACD and a possible double bottom at 101.” “For USD (DXY), we believe that 102.5 is the critical level for the upside. A break above this level will lead to a sharp decline in crypto.”

The MACD is used to measure trend strength, and changes in trend. Positive divergence is when an asset’s price reaches a new cyclical bottom while the RSI or MACD starts to rise, indicating a bullish momentum shift.

DXY price chart with RSI and MACD in second pane. The MACD trendline represents a bullish divergence. (QCP Capital) (QCP Capital)

Parikshit Miishra is the editor.