Sentiment towards a number of major foreign exchange pairs is at extreme levels as the US dollar index breaks to an historic twenty-year trading high. 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.
GBPUSD – Pain Ahead
According to the ActivTrader Market Sentiment tool the majority of traders are still extremely bullish towards the GBPUSD pair, which comes as a surprise considering the fundamental and technical picture.
The ActivTrader Market Sentiment tool shows that 71 percent of traders are expecting more upside in sterling. Given the bullish bias, sentiment is basically warning to stay in the short cable trade.
It should be noted that sentiment is very accurate when it starts to reach extreme levels, and this could be a big hammer blow for sterling bulls this week.
USDJPY – Extreme Sentiment Warning
The ActivTrader market sentiment tool shows that 80 percent of traders are bearish towards the USDJPY pair. This constant one theme over recent months has been warning of more losses ahead for the yen.
The recent policy meeting by Governor Kuroda basically spelled out the fact that the Japanese central bank is going to keep its aggressive QE in place while other central banks raise rates.
I think we are not yet at the end of the up move in the USDJPY pair given the current sentiment metrics. Traders probably need to turn bullish before we see the next major up move in silver prices.
EURUSD – Moving Lower
Market sentiment is bullish towards the EURUSD pair, which is very worrying if we consider that the single currency is trading at a 22-year low against the US dollar currency.
The ActivTrader market sentiment tool showing that some 6w percent of traders currently bullish towards the EURUSD, which is probably meaning that retail is about to experience more pain.
I think it is worth noting that the sentiment bias is not as extreme as other pairs. This could mean that the pace of recent losses in the EURUSD pair may start to marginally slow but not stop.