Market update: Japanese yen outlook - analysis on major currency pairs

Many traders focus on following the crowd, chasing rising assets, and panicking when things turn south. Contrarian indicators, such as IG client sentiment, offer an alternative path, suggesting that some of the best trading opportunities arise when you go against the grain. These indicators aim to measure the overall market mood– overly optimistic or excessively pessimistic – providing signals about potential turning points.

It's important to use contrarian indicators as one part of a broader trading strategy. They shouldn't be relied on as the sole basis for trading decisions. By combining contrarian signals with fundamental and technical analysis, traders can develop a more nuanced perspective on the market, potentially uncovering hidden opportunities. With that in mind, let's delve into the insights offered by IG client sentiment data on the Japanese yen.

USD/JPY technical analysis

IG client data reveals an extremely pessimistic sentiment towards USD/JPY. A whopping 70.65% of traders are currently betting against the US dollar, resulting in a short-to-long ratio of 3.91 to 1. This bearish trend has intensified significantly recently, with the number of traders with net short positions 9.34% higher than yesterday, and 35.63% above last week's levels.

Such strong contrarian signals often suggest a potential reversal, implying the USD/JPY may have room to rise further. Contrarian trading strategies capitalise on the notion that the crowd is often wrong, particularly at extremes when emotions run high. While not foolproof, the intense negativity among retail traders could indicate an overreaction, potentially paving the way for additional US dollar gains.

USD/JPY daily chart

EUR/JPY technical analysis

IG client data shows that 81.19% of retail investors are positioned for a downturn in EUR/JPY, with a ratio of 4.32 to 1 between those with a bullish and bearish stance. The proportion of net-shorts has increased by 0.16% since yesterday and surged by 13.72% compared to last week, whereas the number of traders net-long has dropped by 25.51% from the previous session; and by 26.63% from last week.

Our typical approach is to take a contrarian view of crowd sentiment. The significant net-short positioning on the EUR/JPY suggests prices might continue to rise. The fact that traders are even more net-short than yesterday and last week strengthens this bullish contrarian bias. This indicates the market may be excessively pessimistic, potentially creating a favorable environment for EUR/JPY to push higher.

EUR/JPY daily chart

GBP/JPY technical analysis

IG sentiment data shows that an overwhelming majority of retail clients are taking a bearish stance on GBP/JPY. As of Tuesday morning, a substantial 79.01% of traders are selling, leading to a short-to-long ratio of 3.76 to 1. This bearish sentiment has gained traction lately, with net-short positions increasing by 4.79% compared to yesterday and 13.65% compared to last week.

We often adopt a contrarian approach, and this strong net-short positioning suggests GBP/JPY could have further upside in the near term. The escalating pessimism observed across daily and weekly intervals reinforces this contrarian bullish outlook, hinting at an excessively negative market sentiment that may pave the way for further GBP/JPY gains.

GBP/JPY daily chart

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