Euro Sentiment Warns Against Buying Strength
EURUSD – Retail forex trading crowds continue to sell the Euro against the US Dollar (ticker: USDOLLAR) as the EURUSD trades near multi-month peaks. Going against the crowd means buying into Euro rallies, and we would normally forecast further EURUSD gains based on our Speculative Sentiment Index data. Yet it’s important to understand retail crowd dynamics; traders tend to sell into strength and buy into weakness.
Such a counter-trend strategy most often does well during times of low market volatility, and going against the crowd seems ill-advised given that FX volatility expectations trade near their lowest levels in five years. The Dow Jones FXCM Dollar Index likewise continues to hold key support levels—serving as further warning that the Euro/US Dollar may continue to hold its recent trading range.
The previous US Dollar breakdown may in fact lead to further short-term consolidation, but it will be important to watch critical event risk given a highly-anticipated address by Fed Chairman Ben Bernanke in Jackson Hole, Wyoming. We view major surprises as relatively unlikely, but it seems clear that the US Dollar would react strongly to the slightest shifts in rhetoric.
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--- Written by David Rodriguez, Quantitative Strategist for DailyFX.com
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