Equity markets are kicking off Q4 much how they closed off Q3, on the backfoot and continuing to follow its typical pattern (Figure 1). In turn, risk currencies are out of favour relative to safe-haven currencies and in particular the Japanese Yen. As I mentioned yesterday, I was tactically bearish USD/JPY, not only due to stretched topside momentum, but also the typical pattern that has emerged this year post-quarter-end rebalancing. Additionally, with US yields a touch softer, upside pressure in the pair has been reduced.
Source: Refinitiv, DailyFX
USD/JPY Ramp and Reversal Around Quarter End
However, I suspect the dollar will continue to perform well against several major counterparts, given the factors that have been underpinning the greenback, from safe-haven flows to a hawkish Federal Reserve. Alongside this, technical damage has been done to a host of currency pairs, namely EUR/USD, which is below the 2020 election low and GBP/USD.
IG Client Sentiment: EUR/USD
Data shows 68.93% of traders are net-long with the ratio of traders long to short at 2.22 to 1. The number of traders net-long is 3.04% lower than yesterday and 23.36% higher from last week, while the number of traders net-short is 8.46% higher than yesterday and 24.90% lower from last week.
We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests EUR/USD prices may continue to fall.
Positioning is less net-long than yesterday but more net-long from last week. The combination of current sentiment and recent changes gives us a further mixed EUR/USD trading bias.
As I mentioned above, sentiment in the equity space has deteriorated and perhaps more importantly for the S&P 500, we have seen a close below its 100DMA, something that hasn’t happened since last November. Support now resides at 4233 and 4200 below.
S&P 500 Chart: Daily Time Frame