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Sentiment towards a number of the major currencies remain at an elevated level, which could be a warning that the US dollar long trade may be either warming up or coming to an end ahead of today’s historic Fed meeting. Now is a great time to check out how traders feel about some of the majors, as they look for contrarian trading signals via sentiment readings.
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 are 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 the strongest sentiment bias 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 – Pain Trade
According to the ActivTrader Market Sentiment tool the majority of traders are still very bullish towards sterling, despite the index crashing through the 1.2500 support area at the start of the week.
The ActivTrader Market Sentiment tool shows that 66 percent of traders are expecting more upside in the British currency. Given the bullish bias, sentiment is basically warning that more downside is coming.
It should be noted that sentiment has dropped slightly since last week. I think that retail is probably right about the direction, but they are undergoing one hell of a squeeze right now and ongoing pain.
EURUSD – Worryingly Bullish
The ActivTrader market sentiment tool shows that 73 percent of traders are bullish towards the EURUSD, following its recent large price drop towards the 1.0400 price region earlier last week.
Traders are still expecting more gains, with 73 percent of traders bullish according to the ActivTrader platform. Given that retail traders are typically on the wrong side of the trade, this could mean a continuation of the euro’s downtrend.
In order for the bulls to be right, we really need to see the EURUSD pair recover towards the 1.100 level. This would probably signal that the worst is over for the single in the short to medium-term.
USDJPY – Bears Crushed
Market sentiment towards the US dollar is still bearish, which is not very surprising given that the USDJPY pair has staged a massive breakout this year to historic price high around the 132.00 level.
The ActivTrader market sentiment tool showing that some 78 percent of traders currently bearish towards the world’s leading currency, meaning that retail is convinced the USDJPY pair is heading lower.
I think that the current sentiment is concerning, especially if we consider that the US dollar index has a substantial amount as it arrives at the 2020 highs.
