Sentiment towards a number of key trading instruments is seeing big changes after the recent release of the US CPI report, which saw the US dollar index sinking to a fresh multi-month low on the foreign exchange market. Now is a great time to check out how traders feel about US dollar crosses from a sentiment perspective.
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.
GBPUSD – Bears Trapped
According to the ActivTrader Market Sentiment tool traders remain extremely bearish towards the GBPUSD, despite yesterday’s huge rally above the 1.3700 level, marking a 500-point rally from the lows of 2021.
The ActivTrader Market Sentiment tool shows that 71 percent of traders are expecting more losses in the GBPUSD. This large positive sentiment bias could be hinting that more pain for bears is coming.
Traders that are short sterling could be in trouble if the market starts to protect the 1.3660 level, which has typically been a big pivot for the market, and a monthly trend change point. Furthermore, sterling is now technically bullish.
EURJPY – Euro short
The ActivTrader market sentiment tool shows that traders are 88 percent of traders are bearish towards the EURJJPY, even though the pair has staged a big rally as the euro surged higher on Wednesday.
Traders are clearly betting that the EURJPY pair is overextended, and that eventually euro weakness is going to propel the pair lower. The Yen obviously has a big part to play in the EURJPY pair..
In order for the bears to be right here, we probably need to see stocks dropping alongside risk sentiment, as the EURJPY pair performs well when risk sentiment remains at elevated levels.
USDCAD – Too Bullish
Market sentiment towards the USDCAD is extremely bullish, despite the fact that the USDCAD pair has fallen by more than 400 points from its recent multi-month high over the last few weeks.
The ActivTrader market sentiment tool showing that some 88 percent of traders currently bullish towards the USDCAD pair, despite the recent and sharp corrective move to the downside from the 1.2900 level.
Traders probably need to consider oil prices are surging. In order for USDCAD strength to return not only do we need to see a reversal in the buck, but we need to see oil prices heading back towards $75.00 to $70.00.
