In this post I’d like to address the question, ‘What is foreign exchange market sentiment?’ This might be useful if you’re thinking about changing currencies, but have heard that sentiment toward the UK pound or euro or whichever currency you’re trading is negative, and want to know what this means.
Foreign exchange sentiment is the general feeling toward a currency at a particular time, among investors on the foreign exchange market. It’s a summation of how the countless millions of investors in foreign exchange feel about one currency at present. Sentiment can become more upbeat or downbeat, depending on what’s influencing that currency on a certain day or month. It can also be used to describe the mood on the foreign exchange market as a whole.
For instance then, when looking at sentiment on the foreign exchange market as a whole, one very common way is to describe the market as either having risk appetite or being risk averse. This tells us whether foreign exchange investors are feeling brave (i.e. there is risk appetite) meaning they’re more likely to invest in small or riskier currencies, or whether they’re being cautious, and hence putting their funds in strong and stable economies believed to be safe (i.e. they’re risk averse.)
Depending on whether there is risk appetite or not, the entire outlook for the foreign exchange market can change. The US dollar for instance tends to strengthen when there is risk aversion (i.e. there’s a big political or economic threat in the world) because the US economy is the backbone of the global system. It’s hence a safe place to put money. The UK pound too tends to benefit in times of risk aversion, because it’s thought stable. On the other hand, currencies in smaller and less stable economies such as New Zealand and Canada (whose prospects are tied to the price of commodities) tend not to benefit when there is risk aversion.
In addition to looking at sentiment on the foreign exchange market as a whole, you can also look at sentiment concerning a specific currency. This tends to reflect not the global outlook, but the factors affecting that particular currency at a certain time. These factors tend to be political or economic. For instance then, if you’re looking at the euro right now, you might say that sentiment is cautious but optimistic, because Greece has just received its second EU bailout. This has cheered investors. On the other hand, cautious remains because Europe is in recession right now. This is reflected in euro weakness.
You should now have a better idea what foreign exchange market sentiment is. If you have any other questions about foreign currency exchange then visit foreign exchange specialists Pure FX.