Bitcoin surged above 10,000 for the first time since September of 2019, following the Fed’s commentary that the central bank is taking a close look at digital currencies. There are concerns amongst central bankers that a decentralized currency that is not fully understood could be harmful to economic growth if left unchecked. Fed Chair Powell also said that with interest rates as low, and that the Federal Reserve might not have the ammunition needed to combat the next recession. Bitcoin might have reached overhead resistance but the uptrend appears to be in place.
A View of Digital Coins
While economic growth and inflation were key talking points of Powell’s testimony to the House of Representatives on February 11, the Fed Chair did touch on the topic of digital currencies. When asked the Fed chair said that “Every major central bank is currently taking a deep look,” at digital currencies. Powell said that it’s the Fed’s responsibility to research the use of decentralized digital currency to determine the potential costs and benefits. Powell said that they feel an obligation, to completely understand the technology that is used to drive a digital currency.
The Dollar Finally Takes a Breather
The upward movement of bitcoin has faced resistance in the form of a strong US dollar. The US dollar has been on a tear in 2020, rallying 2.5% by mid-February, driven by capital flows. The onset of the coronavirus generates momentum for capital flows into US-denominated assets. The US stock market is surging, and bond prices are also rising. In fact, US interest rates have fallen quicker than European and Japanese rates. The flow has generated some headwinds for bitcoin trading as the dollar has gained in tandem with bitcoin. The BTC/EUR appears to have broken out to fresh highs.
The Fed is Concerned About Rate Levels
Powell highlighted that current low levels of interest rates, might not provide the Fed with the ammunition that they need to fight future recessions. While the Fed still has room to drop the borrowing rate, interest rates in Europe and Japan are negative. Powell said that the US economy might need the help of fiscal policy in the form of tax cuts and spending increases to drive future consumption.
Bitcoin is testing resistance levels. A break of the 10,540 level would lead to a test of the August 2018 highs near 10,950. Bitcoin has rallied approximately 50% in 2020 and has only experienced minor pullbacks during its run. The trend is upward sloping, with support at the 10-day moving average near 9,826. The 10-day moving average crossed above the 50-day moving average in early January kicking off the short-term trend. The 50-day moving average is poised to cross above the 200-day moving average which is known as the golden cross. This would show that a long-term uptrend in bitcoin prices is now in place.
Despite the upward trend, it appears that short-term momentum is overstretched. The fast stochastic generated a crossover sell signal in overbought territory. The fast stochastic is a momentum oscillator that measures accelerating and decelerating momentum. Reading on the fast-stochastic above 80 is considered overbought and a reading below 20 is considered oversold.
The RSI (relative strength index) which is also a momentum oscillator accelerated higher above 70, which is the overbought trigger level of that index. A reading below 30 is considered oversold. Medium-term momentum, on the other hand, remains positive as the MACD (moving average convergence divergence) histogram prints in the black with an upward sloping trajectory which points to higher bitcoin prices.
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