EUR/USD: dollar index is on its knees, but there are signs we've hit bottom

The dollar index hit its lowest level this year, driven by a surge in US inflation. However, signs of a bottom spotted this week could signal that a turnaround is at hand.

Last week saw a sharp decline in the crypto market. Although not considered a systemic risk, the size of the crypto market's capitalisation is large enough to affect flows in traditional markets.

For example, last month the trading volume of the crypto market exceeded $2 trillion. To participate, one must sell the USD and buy cryptos. Therefore, the weakness of the USD seen in recent months has been supported by the growing popularity of the crypto markets. However, now that the trend has reversed, the dollar is being supported by flows out of the crypto market and into the global reserve currency.

In addition to the rough week in the crypto market, there are other signals that dollar weakness may be bottoming: both the Bloomberg US Dollar Index and the Dollar Index have formed possible reversal patterns.

Double Bottom on the Bloomberg US Dollar Index?

The Bloomberg US Dollar Index, also known as the BBDXY, tracks the performance of a basket of 10 different currencies against the dollar. Unlike the more famous Dollar Index (DXY), it provides a better measure of the strength or weakness of the US Dollar, as its composition is updated regularly, based on factors such as trading and liquidity.

This month, it made a new low from the previous low in January, but still suggested that a double bottom was possible. A double bottom formation doesn't refer to a reversal in price from an exact level, but a reversal from an area.

Bulls might want to see the BBDXY back above 1,150 before talking about a double bottom and aiming for the measured move. If a double bottom is in place, the next target for the BBDXY is 1,200.

The DXY - Bearish Bevel and Bullish RSI Divergence

The technical picture also supports a bottom in the DXY. So far this month, contrarian traders have been able to spot a descending wedge pattern, which is a reversal pattern forming on lows. Combined with a bullish divergence with the Relative Strength Index (RSI), the descending wedge calls for caution.

Overall, despite the persistent weakness in the first half of the month, the signs are there to indicate a reversal in the dollar. What does this week hold?