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[Music] [Applause]
Hey folks, welcome to verified investing.com. My name is Gareth Soloway, chief market strategist here. In today's video, we need to look at the forex markets, the currency markets. All right.
Yesterday I did a video on crude oil, how the setup was extremely bullish and just like that the US goes into Venezuela and captures Maduro. All right. Is this going to create a spike? Is this going to create turmoil in the currency markets? I want to explore the DXY, the dollar yen, the eurousd, and the British pound USD here in this video.
In addition, we need to look at interest rates which are on a borderline major breakout. Yes, that's right. Interest rates actually going higher as the Federal Reserve cuts rates. I'll explain a little bit more as we get into it, but let's start with the DXY.
Here's the DXY. And if you look at this couple things that are amazing, right? So, there's been so much talk about DDOLization, but if you go back here, this is where we were in April of 2025. Look at where we are now. Literally from April and now we're at January, you know, basically January 3rd, January 2nd, we have no price movement on the US dollar. The dollar's gone up, it's gone down, up, down, up, and down, right? And so this talk of denolization, at least on a basis of the dollar versus other currencies, a basket of currencies, at least since April, that hasn't gone on.
Now, prior to April, that it has that we had a huge fall, right? I mean massive drop in the US dollar. We fell here from that high to the low 12%. We ended the year down over 10%. Right? So yes, there was a big drop in the US dollar in 2025. But it was all in the first portion, the first quarter basically of 2025. Why? Because that's when the tariffs were announced. So panic selling as Trump took the presidency over and ultimately again basically rolled out the tariffs. Uh what that tells us by the way is that foreign countries had a heads up this was coming. Granted Trump did choreograph this and say it was coming but then other countries started to unload the US dollar so that the US doesn't have as much control. Remember when you have the reserve currency of the world you control the world. All right. So there's this push now from other countries to not allow the US to have as much control over them as they did in the past.
All right, so let's go back to the chart and take a look at some key levels. And there are signals, by the way, that we're setting up for another major down move in the dollar. Potentially 2026 could have as much as 10% downside. Now, I want to show you this. So, if we zoom out and we flip over to our weekly chart and we go back to 2008 and this was the financial crisis, what do we do here? We take a trend line up here and we bring it here and we drop it down. Right? So, what we're really seeing is that in the period from '08 now to 2026, we have been in an actual uptrend on the US dollar. Now, again, many people would say, "Oh, but you said the dollar fell 10% in 2025, in the first quarter 2025." Well, yeah, it did because it was up here and it fell back down to kind of this trend line of support. Now, the issue here is that this is not a good trend line to be hammering on because this again has been our uptrend. And if we break this uptrend, right, and we break it to the downside, the dollar has very little support, first support would be right in this range around 89 to 90 on the DXY. That would be an almost another 10% drop in the US dollar should it break this key level around 96 to 97. Currently trading, we're currently trading at 98 and change. All right.
Now, what makes me think that we're going to break down? Couple things. I'm going to flip over to the bigger time frame. We're going to go to the monthly chart now. The monthly chart. Here's our range, right? All right. So, couple things. number one in technical analysis. And you guys know I've studied technical analysis for decades, and it's really my strong suit, right? Being able to look at a chart, pinpoint key levels, understand price pattern, and time. It's why I do these videos to help educate everyone on this method because it's very logical. It's essentially you becoming the casino versus the gambler, right? Gamblers are always taking risks. They're taking kind of 5050 or worse opportunities trying to make a big score. the best traders, the institutional money, which I have been and I've consulted and I've trained these traders how to trade. Ultimately, this is about probability. And so, you're never no institutional traders, right? Unless they have insider information, right, all the time. But you can put probability in your favor. And if we look at this, what we know is if we draw a trend line here, and I'm going to draw this out so you guys can understand. you have a trend line up and as price hammers on it, it weakens it like a door, right? So again, if a door is locked and you hammer on it more and more, right? So you ram against the door, back off. Ram against the door, back off. Ram against the door, back off. What's going to happen eventually? It doesn't matter how weak you are, how strong you are. If you're strong, maybe you break it down on the second or third hit. If you're weak, maybe the fourth or the fifth hit. But either way, the pressure against the door will eventually make the hinges get weak and the lock get weak. And what happens? A breakdown. And that's exactly the pattern here that we're seeing over and over again. We're hammering on this level. And so what this implies is that we are likely, if we keep hammering on this zone here, we are likely going to break to the downside on the DXY.
In addition, what reinforces that, and let me clean up the chart here so we can keep it as crisp and clean as possible, is that we're actually forming another pattern here that is an insightful basically giving us probability. And that pattern is what is this called folks? This is called a bare flag. Okay? Now bare flags are where price falls and then it starts to bounce a little bit and it essentially consolidates gearing up for the likely outcome which is another down move. And that's exactly what we are forming over here on the chart. Down move chop chop chop chop chop and then it's coinciding with multiple hits on the DXY which then raise the probability of a breakdown in the US dollar.
Now again what's going to cause this? This is I'm going to give you my thesis on what is going to cause a breakdown. So, you know, again, the charts are the charts, right? Charts don't lie. Charts have no agenda. They just are what they are. Um, it's a way of putting probability in our favor. But in essence, if you want the fundamental angle here, is that other countries continue to be very nervous about the control that the the administration has, that the US has in general. In fact, there's a stat here, and I'm going to go to the the US 10-year yield in a second, which is unbelievably bullish. But of all the US debt now, 10 years ago, 40% of all US debt being sold was bought by foreign governments, right? So, foreign governments were basically the biggest buyer of US debt. In today, just 10 years later, it's only 15%. Why? Because again these other countries know that the more treasuries that they are holding the US debt they are holding the more they need to support the US because they want to get paid back. They don't want to see a default. All right. But the less they hold the more independent they can become. You see how this works? It's actually remarkable. So ultimately that is very important data. The biggest buyers now are funds of US debt. So you have funds and pensions and all these other things. And the the scary thing about that is that these funds like a a sovereign entity, a country, they're not going to care about a recession or a market crash. They're not going to dump a trillion dollars in US debt just because of a crash, right? They're playing the long game, right? They want that that security. But once you get into funds and start and you start to see issues like margin calls on a fund, they will dump it and that puts the risk on a crash in the US bond market. Crazy stuff.
All right. Well, let's go back to the chart. So, we now have analyzed the DXY. It is bearish on the bigger time frame. Doesn't mean it's not going to bounce a little bit here and continue to bear flag, but the idea is you have the bare flag which tells you downside and you have multiple hits of this longer term trend line which goes back to the financial crisis low. And if this breaks, we've bro broken the trend from the financial crisis low, right? That's very, very bad.
Now, if we go to the 10-year yield, the reason I'm bringing this is because of what I just talked about. So, we have we obviously know that the Federal Reserve has been lowering rates. And the idea is is that well, shouldn't all rates go down? The problem is the Fed doesn't control the long end, right? So, the Fed only controls short end, short end treasuries. Long end, tens, 20s, 30-year bonds, the markets control. They the markets set that. And so the less faith in the US financial system that the US has or I should say that foreign governments have of the US, the more they're going to demand. And this is the same thing for funds, right? So we know 15% is bought by sovereign entities, countries. We know funds are buying a majority now and the Federal Reserve is kind of buying some, too. But ultimately, anyone that looks at the US is now saying, "Wait a minute, we need to demand a higher interest rate if we're going to take on the risk that we actually think we're going to get our money back or not." Right? Because that's the idea of an interest rate is the interest rate is proportional to how safe the investment is. If the investment is safe and you're 100% guaranteed to get your money back, you'll accept a smaller interest rate, right? If it's a high risk, I mean, go to some of these countries like Venezuela and ask for, you know, let's say we want to buy some debt from Venezuela. Well, guess what? We're going to have to seriously demand like a massive interest rate for taking on the risk of buying debt from some of these countries. That's the same way. And now that you have Trump looking to put in essentially a talking head in the Federal Reserve chair position after Powell, the idea is is that that is going to diminish the trust in the US financial system and the Fed and the independence of the Fed. And anyone buying US debt is going to demand a higher yield. And therefore, when we look at the chart, this is a classic, what kind of pattern is this? Bull flag. And look, it's just about to break out above 4.2%. Watch this in the next week. I do think it's going to break out. You could even make a case you have an inverse kind of head and shoulder pattern here, right? Beginning to form or has been formed and it's right at that neckline for a breakout. Where are yields going to go in the near term? I would suspect around 4.4% if we do the measured move here. And we can do that real quick, guys. So the way you calculate an inverse head and shoulders target price, you take the lowest point to the neckline and then from the breakout point, you go here and this would be around 4.4% 4.5% in that vicinity.
All right, now let's get into the euro. The euro is doing exactly what we just kind of discussed, right? So the reason why I say this is we know the dollar is looking bearish. The dollar is getting ready probably by midyear 2026 to break down if not sooner. So it would imply that the Euro US dollar is has broken out or is in the process of breaking out and is going to go higher and that's absolutely confirmed by the chart. So flip over to the weekly chart, look at this trend line and look at the breakout already. This is a chart that has just broken out of a steep downtrend. And when you break out of these downtrends, yeah, sure, you consolidate and then I would say about 80% of the time you consolidate the breakout and then you go higher. So the euro is likely going to strengthen here in the coming months against the US dollar.
British pound exactly the same. And again, that meshes, if you think about it, you can connect the breadcrumbs here, right? We talked about the dollar pattern, the bearishness, what's going on. Yields, which are the the 10, the 20, and 30, you're looking bullish. those are starting to look like yields are going to be breaking out to the upside. Um, which be is because obviously the the the faith is being lost in the US financial system. DD dollarization is occurring over the longer term. Um, and that ultimately implies foreign currencies are going to do better against the US dollar. And you can see it here, pivot high, pivot high, pivot high, breakout right here, retrace, retrace, and then my guess is like that. That's what the pattern, that's what probability suggests.
Lastly, we will look at the US dollar euro. So, this is flipping it on its head. And this is telling us, believe it or not, this is telling us that the yen is actually going to continue. So, if there's one worse All right, this is kind of crazy, but if there's one worse currency out there than the US dollar right now, and I'm I'm not listen, I'm not comparing it to like Venezuela or or these other currencies, right? I mean, we're talking about the big players here, right? the the the Canadian I haven't looked at the the Canadian dollar yet, but um we're not going to do that today. The video is getting too long. But ultimately, if you're looking at the big, let's say, the big three, the big four, everything looks like it's going to strengthen against the US dollar except the dollar yen. The dollar yen on the other side has continued to show weakness, which kind of makes sense because what do we know? We know that their interest rates are going up because people are nervous that they can't repay their debt. And ultimately that means again the faith in the yen is being weakened even against the US dollar. And again folks the dollar the yen against the dollar does not look great. The dollar looks like it'll it'll hold its own against the yen but not against the euro and British pound.
Interesting video today. And again you know you look at what's going on here. Um us the US going into Venezuela capturing Maduro. um it likely will again create more nervousness. I mean initially I think the flood is to go to safety of the US dollar, right? The dollar is still a pseudo safe haven asset. But over time these type of moves can be looked as at as as destabilizing and making other countries very nervous, right? Very very nervous about holding too many US dollars and holding too much US debt.
All right, guys. Enough said on my part. Go have a great great weekend. Thank you so much for tuning in. I'll talk to you soon. Take care.