Sentiment towards major currencies is extremely important this week after the US dollar index roared higher after the recent solid US jobs report. Now is a great time to check out how traders feel about some of the major three metals, 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.
USDInd – Overextended
According to the ActivTrader Market Sentiment tool the majority of traders are still very bullish towards the US dollar index, which comes as no surprise considering last week’s positive US jobs report
The ActivTrader Market Sentiment tool shows that 79 percent of traders are expecting more upside in the buck. Given that the bullish bias is extreme it is possible we will soon see a bearish correction.
It should be noted that sentiment towards the greenback is very important for the entire currency market due to the US dollars position as the world’s reserve currency.
EURUSD – Mild sentiment
The ActivTrader market sentiment tool shows that 60 percent of traders are bullish towards the EURUSD pair, following the recent run higher in the US dollar index.
The recent strong jobs report and rising inflation bodes ill for the euro dollar. I also think that the Fed being more hawkish after the unemployment rate fell could nail the EURUSD lower this month.
I think we are not yet at the end of the down move in long to medium-term horizon given the state of the eurozone economy. With this is mind we should probably expect more losses in this pair.
GBPUSD – Bull bias
Market sentiment is still slightly bullish towards the GBPUSD pair, which is very surprising if we consider that the pair has lost nearly 500 points in one week.
The ActivTrader market sentiment tool showing that some 57 percent of traders currently bullish towards the GBPUSD which is probably meaning that retail is starting to experience less pain than recently.
I think it is worth noting that the sentiment bias is not overstretched, which certainly makes me suspicious that we might need to see more GBPUSD downside this week.
