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Surprising Risk-Off Signal From the EdgeFinder

September 25, 2023
Frank Cabibi

Last Friday's report showed a significant change in global market sentiment from smart money. What COT signaled has turned ultra-risk-off for traders who have been hoping for Fed fears to subside. This news could spark up worries about higher interest rates for the long term.

EdgeFinder Analysis

GBPUSD is now a -12 on the EdgeFinder indicating extreme bearishness on the pair. With a -3 on COT alone, price is being taken under support levels on the 1D timeframe. Retail is majority long this pair as they anticipate a rally some time soon, but it might not come in time.

Due to dollar strength this month, many currencies like EUR, GBP, AUD, CAD have been under pressure. To see the score move heavily from a bearish reading to an even stronger one is not a good sign for this pair.

EURUSD is breaking lows on the 1D timeframe and plummeting lower towards a double bottom. Another COT report showed heavy selling on the euro and heavy buying on the dollar. Price could not break the trend line which suggests price won't be able to until sentiment changes.

The pair looks like it may either test the heavy support level at 1.05152 or it might come up to test the resistance level at either trend line. There is also a new resistance level after price broke lower around 1.06357.

NZDCHF moved from a neutral reading to a bearish reading over the weekend. Although trend reading is strong to the upside, there is some disagreement from seasonality. Smart money had been buying up the Swiss leading up to last week's SNB decision. Meanwhile, the kiwi saw a heavy increase in short contracts.

Although many factors influence price moves, it is important to notice how aggressively smart money moved this past week. Seeing a -12% change to the sell side on kiwi is not common for weekly reports. This was an important pair to highlight for the -3 score in COT as well.

Retail Spotlight

Retail is strongly bullish towards risk-on pairs, specifically the ones against USD and JPY. EJ, UJ, and CHFJPY are the three most shorted currencies from the crowd, and AUDCAD, NZDCHF and GBPCHF are the most bought pairs.

Smart Money Spotlight

If we take a look at last week's activity from smart money, we can tell that institutions across the board are majority long the USD, CHF and JPY. This has not been the case for some time. What is also alarming to investors is the rate at which sentiment flipped in a mere week. EURUSD is the pair being analyzed at the bottom. With a gradual decrease in longs on the euro and a sudden spike in longs for the dollar, EU's positional bias flipped from a +11% to a -7% in such a short span of time.

Fundamental Spotlight

Here are the inflation rates for EUR and AUD who will be reporting CPI later this week. Although inflation does appear to be coming down, the curve appears to be flattening in the most recent months. It is possible these economies could be experiencing sticky inflation like in the US.

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