Sentiment towards several major currency pairs is changing, due to an increase in market recognition that the FED is going to come in hot with a 50-basis point hike in May. Now is a great time to check out how traders feel about the FX market, as they look for contrarian trading signals.
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 are considered to be at an extreme level, while market sentiment readings over 80 to 95 percent are 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.
EURUSD – Bullish Bias
According to the ActivTrader Market Sentiment tool traders, a huge majority of traders are now bullish towards the EURUSD, despite it cracking the 1.0800 level last week and remaining in the doldrums.
The ActivTrader Market Sentiment tool shows that just 84 percent of traders are expecting more gains in the most widely traded fx pair. Given the major rise in DXY lately, sentiment is still warning that more downside is coming.
I think the technicals are still bearish below the 1.0830 level and the EURUSD could easily move back towards the 1.0700 level. Couple this with the bullish sentiment bias, I think more downside is likely.
USDJPY – Overly Bearish
The ActivTrader market sentiment tool shows that 91 percent of traders are bearish towards the USDJPY pair, following its recent epic price breakout to the upside as it edges closer to the 130.00 level.
Traders are still not expecting more gains, with 91 percent of traders 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 a huge 500-point reversal from current levels, which would suggest that a meaningful price top is in.
GBPUSD – Major Change
Market sentiment towards the GBPUSD pair is becoming more bullish, which is not very surprisingly given that GBPUSD pair has made a strong attempt to push away from the 1.3000 level.
The ActivTrader market sentiment tool showing that some 72 percent of traders currently bullish towards the leading Japanese index, meaning that retail is on the whole, starting to turn bullish.
I think that the current sentiment has all the hallmarks of a coming upside move, with the current worries about growth, I still think we could see the GBPUSD pair steadily rising if stocks can weather selling pressure.