FX Trading crowds have aggressively bought the US Dollar (ticker: USDOLLAR) into sharp declines versus the Euro and other currency counterparts, and FXCM Execution Desk data shows retail traders are their most net-short EUR since it set a top at $1.3285 in May.
We most often take a purely contrarian view to crowd sentiment; if crowds are selling, we most often look to buy. Such a strategy works well during trending market conditions as retail traders tend to sell into strength and buy into weakness. The obvious question becomes whether the US Dollar can remain in its most recent downtrend. The fact that the Dow Jones FXCM Dollar Index recently broke below its 200-day Simple Moving Average suggests the EURUSD could indeed continue higher.
The major caveat is that FX options volatility expectations trade near five-year lows, and such muted forecasts effectively rule out substantial moves for major currencies. The Dollar breakdown could indeed result in short-term consolidation.
How do we interpret and trade with the SSI? Watch an FXCM Expo Presentation that explains the SSI.
--- Written by David Rodriguez, Quantitative Strategist for DailyFX.com
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