The Dollar Index has declined to 2021 lows, led by a surge in US inflation. However, signs of a bottom spotted this week may signal a turn is just around the corner.
This week was marked by a sharp selloff in the cryptocurrency market. While not viewed as posing a systemic risk, the size of the cryptocurrency market’s capitalisation is big enough to affect the flows in traditional markets.
For example, in April, the cryptocurrency market’s trading volume exceeded $2 trillion. To participate, one should sell the dollar and buy crypto. Hence, the weakness in the dollar seen in the past months was supported by the cryptocurrency markets’ increased popularity. However, now that the trend has reversed, the dollar is supported by flows pouring out of the cryptocurrency market and into the world’s reserve currency.
Besides the cryptocurrency market’s harsh week, some other signals pointed to a possible bottom in the dollar’s weakness – both the Bloomberg US Dollar Index and the Dollar Index 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 ten different currencies against the dollar. In contrast to the more famous Dollar Index (DXY), it provides a better measure for the US dollar’s strength or weakness because its composition is updated regularly, based on factors such as trade and liquidity.
In May 2021, it touched a new low when compared to the previous one from January 2021, but still suggested that a double bottom was possible. A double-bottom formation does not refer to the price reversing from one exact level, but reversing from an area.
Bulls may want to see the BBDXY back above 1,150 before calling it a double bottom and targeting the measured move. If a double bottom is in place, the next target for the BBDXY is 1,200.
The DXY – Falling Wedge and Bullish RSI Divergence
The technical picture supports a bottom in the DXY too. In May so far, contrarian traders could have spotted a falling wedge pattern, which is a reversal pattern forming at bottoms. Coupled with a bullish divergence with the Relative Strength Index (RSI), the falling wedge calls for caution.
All in all, despite ongoing weakness in the first half of the month, signs were there pointing to a dollar’s reversal. What will next week bring?