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Sentiment towards a number of British pound related trading pairs is changing after the Bank of England became yet another global central banks to hike interest rates last week. Now is a great time to check out how traders feel about some of the major indices, 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.
GBPJPY – Bearish Bias
According to the ActivTrader Market Sentiment tool the majority of traders are extremely bearish towards the GBPJPY pair, which is a surprise considering the recent huge decline in the Japanese yen.
The ActivTrader Market Sentiment tool shows that 74 percent of traders are expecting more downside in the GBPJPY pair. Given the bearish bias, sentiment is basically warning that more upside is coming.
It should be noted that sentiment has actually stayed the same since last week. I think that retail traders are trapped in GBPJPY shorts, and they are undergoing more serious short side pain right now.
GBPCHF – Sentiment Widens
The ActivTrader market sentiment tool shows that 66 percent of traders are bullish towards the GBPCHF pair. This is hardly surprising given that the Bank of England increased rates last week.
Traders are increasingly expecting more rate hikes ahead, and we should also remember that interests rates for Switzerland remain in negative territory despite last week’s interest rate hike from the SNB.
I think we also have to consider the political and macroeconomic situation in the United Kingdom. This could spell more heavy losses over time for the British currency, despite the rate differentials.
GBPUSD – Slightly Bullish
Market sentiment is slightly bullish towards the GBPUSD pair, following the recent near 400-point recovery from the lows of the year, traders are probably expecting more gains along the road.
The ActivTrader market sentiment tool showing that some 57 percent of traders currently bullish towards the GBPUSD pair, meaning that retail is more convinced that the GBPUSD pair is heading higher.
I think that the current sentiment skew is not concerning, especially if we consider that the GBPUSD pair is in a downtrend, and that the FED are likely to do a 75-basis point rate hike again next month.
