Euro Could Recover Against US Dollar
EURUSD – Sharp Euro/US Dollar volatility has made for indecisive forex trading crowd sentiment. Yet we believe that the Euro may have set a significant sentiment extreme and could continue trading higher through the last weeks of 2011.
Our Speculative Sentiment Index (SSI) data shows that the majority of retail traders are now long the Euro against the US Dollar. We most often use the SSI as a contrarian indicator; if most traders are long, we look to go short. Yet the ratio of traders long to short is a meager 1.16 to 1, and we would ideally see a much stronger shift to turn bearish.
FX Options market volatility expectations remain quite low, and risks show that the EURUSD may remain in a broad trading range into year end. Thus we will stay away from chasing Euro weakness, and indeed this lines up with our views on FX Options and futures sentiment.