Market sentiment analysis:

Trader confidence is suffering from high energy prices, fears of inflation and rising yields on US Treasuries.Once the current period of consolidation is over, these factors are likely to reassert themselves.Meanwhile IG client positioning data are sending out a bullish signal for GBP/JPY.

Trader confidence still low

Trader confidence remains low as high energy prices, fears of inflation and rising sovereign bond yields spook investors. For now, the markets are pausing for breath but these factors will likely re-emerge, hitting stock prices and benefiting the safe-haven US Dollar.

For other currencies, the impact will likely be mixed, with the Japanese Yen sinking as the Bank of Japan will be one of the last central banks to increase interest rates, if it does at all, but the Australian Dollar likely to benefit from higher commodity prices and GBP from expectations of an increase in UK rates by year-end.

Against this background, IG client sentiment data are sending out a bullish signal on GBP/JPY after huge increases in net-short positions by retail traders.

GBP/JPY Price Chart, Daily Timeframe (May 20 – October 12, 2021)

Chart by IG (You can click on it for a larger image)

Bullish signal for GBP/JPY

The figures show 28.72% of traders are net-long GBP/JPY, with the ratio of traders short to long at 2.48 to 1. The number of traders net-long is 10.45% higher than yesterday but 25.75% lower than last week, while the number of traders net-short is 26.38% higher than yesterday and 62.54% higher than last week.

Here at DailyFX, we typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests GBP/JPY prices may continue to rise.Traders are further net-short than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger GBP/JPY-bullish contrarian trading bias.

In this webinar, I looked at the trends in the major currency, commodity and stock markets, at the forward-looking data on the economic calendar this week, at the IG Client Sentiment page on the DailyFX website, and at the IG Client Sentiment reports that accompany it.

— Written by Martin Essex, Analyst

Feel free to contact me on Twitter @MartinSEssex

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