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Sentiment towards the US dollar is extremely important this week after the uptrend in the greenback looks to be reaching new high and prices start to settle into a higher price range. Now is a great time to check out how traders feel about some of the major currency pairs and the US dollar index, 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.
US Dollar Index – Up Trend
According to the ActivTrader Market Sentiment tool the majority of traders are still very bearish towards the price of the US dollar, which comes as no surprise considering last week’s epic price run above the 109.00 handle.
The ActivTrader Market Sentiment tool shows that some 86 percent of traders are expecting more downside in the index. Given that the bearish bias is now extreme it is certainly possible for the greenback to head higher.
It should be noted that sentiment is very important for currency traders. If sentiment remains negative, then it could seriously accelerate the upside further.
GBPUSD – Cable Bulls
The ActivTrader market sentiment tool shows that 74 percent of traders are bullish towards the price of the British pound against the US dollar, despite the bear trend in the pair. Fading cable strength had seen a constant one-way way.
The recent policy breakout in the buck is further hampering any recovery in the GBPUSD pair. I also think that the Fed being more bullish towards rate hikes could be seen as a major price positive for the greenback.
I think we are not yet at the end of the down move in medium-term horizon given the state of the British economy. However, in the short-term we could certainly expect a push towards 1.1450 again just based on sentiment alone.
EURUSD – Sentiment Remains
Market sentiment is still very bullish towards the price of the euro against the US dollar, which is not very surprising if we consider that the energy crisis in Europe has got much worse over recent days.
The ActivTrader market sentiment tool showing that some 74 percent of traders currently bullish towards the euro currency, which is probably meaning that retail is starting to experience more pain again.
I think it is worth noting that the sentiment bias has dropped slightly. If this was to continue we could recently expect less positive sentiment to support the price around current levels.
