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Forex Crowd Sentiment Favors Euro Strength, but US Dollar not Done Yet

By , Quantitative Strategist
04 October 2012 15:10 GMT

Retail forex traders continue buying aggressively into US Dollar (ticker: USDOLLAR) declines against the Euro, but the EURUSD may have difficulty breaking above $1.30 given a dovish European Central Bank.

EURUSD – Euro Forecast Remains Bullish, but $1.30 Resistance Critical

GBPUSD – British Pound Trading Outlook Warns of Turn

USDJPY – Japanese Yen Sentiment Points to Potential Top

USDCHF – Swiss Franc Expectations Mixed as US Dollar Resilient

USDCAD – Canadian Dollar Outlook Points to Strength

GBPJPY – Crowds Remain Long GBPJPY But Sentiment Warns of Turn

ssi_table_story_body_Picture_11.png, Forex Crowd Sentiment Favors Euro Strength, but US Dollar not Done Yet

Retail crowds have been consistently net-short EURUSD since the pair crossed above $1.24 on August 20, and we have accordingly taken a contrarian position in favor of Euro strength. That has continued into this week as we see EUR short interest grew 15 percent in the past 7 days, and the clear question becomes whether the Euro can break above the $1.30 mark.

Yet an especially dovish European Central Bank threatens to sap EURUSD strength, and indeed a break higher is by no means guaranteed despite clearly one-sided retail sentiment.

We further see evidence that crowds are relenting on other US Dollar pairs; short interest on the GBPUSD actually fell 15 percent, while USDJPY longs tumbled 26% on the week.

We will need to see a more substantive shift in sentiment to call for a larger US Dollar reversal, but we thus far see early signs that the EURUSD rally may soon come to an end.

ssi_table_story_body_Picture_10.png, Forex Crowd Sentiment Favors Euro Strength, but US Dollar not Done Yet

Written by David Rodriguez, Quantitative Strategist for DailyFX.com

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04 October 2012 15:10 GMT