On these pages, we've shown before how powerful a force market sentiment can be. When market players' collective feelings about their markets reaches an optimistic or pessimistic extreme, more often than not you can expect prices to reverse.
Ironically, an extreme in sentiment is also the moment when almost everyone (that is, everyone who is not paying attention to sentiment measures) is convinced that the trend will continue.
The latest action in the U.S. dollar is a good example of that. Early last week, the buck showed weakness, and on June 10, "Analysts said increasing confidence that the global slowdown might be stabilising prompted investors to sell the dollar..." (The Financial Times)
The very next day, the U.S. dollar took the upper hand. The euro-dollar exchange rate (known to forex traders as the EUR/USD) topped near $1.4147 on June 10 and hit a low of near $1.3750 on June 15. Can't help but feel bad for all those investors who sold the dollar five days prior.
Update For: Wednesday
Posted On: Tue, 09 Jun 2009 19:30:06 GMT
EURUSD Last Price: 1.4076
[Topping] Key Level: 1.4338. Despite the euro gains on Tuesday, the recovery from near 1.3800 is so far still in three waves. The recovery has also retraced just about 61.8% of the prior decline. A decline below the 1.3940 area ... should be viewed as a bearish event, signaling a turn toward dollar strength.
Now that the USD has broken below that important $1.3940 level, don't bet on the mainstream news to tell you where it's likely to go next. EWI's intensive Currency Specialty Service can give you our latest forecasts right now.