In the past month, there was significant negative news for the euro— Portugal defaulted and the government fell, Ireland held elections, there were tensions in Libya, and a European summit produced no tangible results.
Looking purely at the fundamentals, one would have expected the EUR/USD to fall, but instead, it rose. FXCM’s Speculative Sentiment Index (SSI), on the other hand, was consistently negative, pointing to EUR/USD gains. The SSI filter indicated not to follow the negative sentiments of the news and it was right. Here are specific days of fundamental news and respective SSI index numbers:
The SSI Diary on EUR/USD, March–April 2011
- March 24
Fundamental News: The European summit failed to produce any answers in combating the Euro crisis. This may lead to a fall in EUR/USD.
Speculative Sentiment Index: The FXCM trading crowd has remained fairly net short the euro against the US dollar, showing few important signs of relenting thus giving contrarian signal to stay long into the EUR/USD rallies.
- March 31
Fundamental News: Irish bank stress tests were lower than expected. This may weaken EUR/USD.
Speculative Sentiment Index: Euro forecast continues to rally. Nearly 67% of traders are short and the SSI is negative at -2.04. As a contrarian indicator, the SSI signals more EUR/USD gains.
- April 6
Fundamental News: Portugal asks for EU assistance. Not good for the euro.
Speculative Sentiment Index:The ratio of long to short positions in the EUR/USD stands at -2.17 as nearly 68% of traders are short. The SSI is a contrarian indicator and signals more EUR/USD gains.
- April 7
Fundamental News: The European Central Bank (ECB) is expected to move the markets with its decision on whether to raise interest rates and if so, by how much. Interest rate markets predict a virtually certain 25 basis point hike, with a 50% chance of a 50 basis point move.
Speculative Sentiment Index: EUR/USD ratio narrows on bets for an ECB rate hike. The ratio of long to short positions in the EUR/USD stands at -1.69 as nearly 63% of traders are short. Short positions are 6.3% lower than yesterday. The SSI is a contrarian indicator and signals more EUR/USD gains.
EUR/USD Rate, SSI, Long/Short Amount 3/17/2011–4/7/2011
FXCM’s Speculative Sentiment Index (SSI) can be used by traders, analysts, and currency followers alike to gauge forex market sentiment. Speculators can use the SSI to gain an advantage in the market by using it as a new method of market analysis.
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