Sentiment towards a number of currency pairs is changing, following the recent decision by the Bank of Japan not to change monetary policy. Now is a great time to check out the most extreme sentiment traders 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 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.
EURJPY – Short squeeze
According to the ActivTrader Market Sentiment tool shows a large majority of traders are still bearish towards the EURJPY, which hints at a massive, short squeeze after the recent BOJ policy decision.
The ActivTrader Market Sentiment tool shows that only 325percent of traders are expecting more upside in the single currency against the Japanese currency decision.
It should be noted that the EURJPY pair has rallied substantially after the BOJ decision and this sentiment metric is extremely bullish for the EURJPY pair.
GBPJPY – Bears crushed
The ActivTrader market sentiment tool shows that 27 percent of traders are bullish towards the GBPJPY as the pair starts to go parabolic after the recent Bank of Japan monetary policy decision.
The sentiment bias certainly alludes to more upside trading, however, it is important to state that 73 percent bullish sentiment is reaching extreme levels and a slight unwinding may happen soon.
I think we also have to consider that the USDJPY is probably overbought and that trade is becoming quite crowded now.
USDJPY – The flipping
Market sentiment towards the USDJPY has seen a big change since early week as the risk sensitive pair rallies from 128.00 to 131.50.
The ActivTrader market sentiment tool showing that 57 percent of traders currently bullish towards the USDJPY currency pair right now. 91 percent of traders were bullish at the start of the week.
I think it is worth noting that retail was actually right about this trade at the start of the week. However, they have cashed or taken quite significantly already.
