Sentiment towards the US dollar is worth checking out this week after the buck rallied to its highest level since May 2002. 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 the Same
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 intervention from the BOJ.
The ActivTrader Market Sentiment tool shows that some 80 percent of traders are expecting more downside in the index. Given that the bearish bias is now extreme it is certainly possible the pair can head higher.
It should be noted that sentiment has risen by 5 percent since last week. If sentiment remains this negative, then it could seriously accelerate the upside further.
GBPUSD – Cable Crushed
The ActivTrader market sentiment tool shows that 70 percent of traders are bullish towards the price of the British pound against the US dollar, after last week’s epic move to the downside and eventually 1.0800.
The recent policy announcement of a new budget by the new UK Chancellor spooked financial markets in the UK and also caused an epic market sell-off of the British pound currency.
All the time this sentiment metric remains this high we are likely to see more losses. Personally, I would not be surprised to see the British currency moving towards parity.
DXY – More Upside Ahead
Market sentiment is still very bullish towards the US dollar, which is not very surprising if we consider that the rate hike from the FED last week which was a second consecutively high one.
The ActivTrader market sentiment tool showing that some 67 percent of traders currently bullish towards the US dollar currency, which is probably meaning that retail is starting to experience more pain again.
I think it is worth noting that price charts show the potential for a run towards the 115.00 area. If this area is broken I see no real support until the 120.00 price level.
