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Sentiment towards the US dollar is worth checking out this week after the buck started to retreat from a 20-year trading high. 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.
USDJPY – Sentiment Remains
According to the ActivTrader Market Sentiment tool the majority of traders remains bearish towards the price of the US dollar, which comes as no surprise considering last week’s epic price run above the 140.00 level.
The ActivTrader Market Sentiment tool shows that some 75 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 recovery higher.
It should be noted that sentiment has come down slightly since last week. If sentiment remains negative, then it could seriously accelerate the upside further.
GBPUSD – Cable Bulls
The ActivTrader market sentiment tool shows that 71 percent of traders are bullish towards the price of the British pound against the US dollar, after last week’s run higher. Fading sterling strength has been a top trade this year.
The recent policy announcement of a new UK PM is also helping the recovery in the GBPUSD pair. On the contrary, 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 at least one more push towards 1.1450 again just based on sentiment alone.
EURUSD – No Change
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 rate hike from the ECB last week which was an historic high one.
The ActivTrader market sentiment tool showing that some 64 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.
