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Sentiment towards several major currencies is changing quickly as the market starts to price in an emergency 50 basis point interest rate hike from the Federal Reserve at the May 4th policy meeting. Now is a great time to check out how traders feel about a few major currency pairs against the US dollar.
The trading sentiment is most effective when retail traders are running counter trend, meaning that they are heavily leaning against established market trends and in increasingly large numbers. Additionally, once big sentiment skews build it can be a powerful sign that the retail crowd is being too one-sided.
Typically, market sentiment readings for an instrument that has reached around 75 to 80 percent is considered to be at an extreme level, while market sentiment readings over 80 to 95 percent is often a strong indication that the trade could be topping or about to reverse at any time.
I will now look at some of the strongest sentiment biases amongst the retail crowd right now. Some of the sentiment skews suggest that current price trends in FX, stocks and precious metals are breaking point and big moves may be nearing.
GBPUSD – Not Bearish
According to the ActivTrader Market Sentiment tool, a large majority of traders are now bullish towards the GBPUSD pair, despite a broad recovery in global indices and a hawkish UK central bank.
The ActivTrader Market Sentiment tool shows that 70 percent of traders are expecting more gains in the British government. This bullish one-way positive sentiment reading has remained so during the recent weeks and is still warning that more downside is coming.
I think the technicals are also bearish below the 1.3300 level and the sterling could easily move back under the 1.3000 level. Couple this with the bullish sentiment bias, I think more losses are likely.
USDJPY – 125.00 Calling
The ActivTrader market sentiment tool shows that 89 percent of traders are bearish towards the USDJPY pair, following its recent price correction down towards the 122.00 level after hitting an important multi-decade trendline.
Traders are still not expecting more gains, with 89 percent bearish according to the ActivTrader platform. Given that retail traders are usually on the wrong side of the trade, this could get very painful for bears.
In order for the bears to be right, we really need to see some more US dollar weakness, which does not look to be the case at the moment, as the DXY prepares to target above 100.00.
AUDUSD – Commodity Play
Market sentiment towards the AUDUSD pair is becoming more bearish, which is not very surprisingly given that the US dollar index is rising and moving back towards the technically important 100.00 resistance level.
The ActivTrader market sentiment tool showing that some 63 percent of traders currently bearish towards the AUDUSD pair, meaning that retail is on the whole still bearish.
I think that the current sentiment has all the hallmarks of more temporary upside, with the current bullish market cycle in commodities, I still think we could see the Australian dollar rallying.
