1. Understanding Market Sentiment

Market sentiment is essentially the mood of the market, or the collective feeling of traders and

investors towards a specific asset. In forex, sentiment can be considered a reflection of how

traders expect a currency to perform in the future. It isn't just about price; it's about perceptions,

expectations, and interpretations of global economic and political events.

How Sentiment Develops:

• News & Events: Events like interest rate decisions, geopolitical tensions, or economic data releases affect how traders feel about the market. For instance, if the US announces a solid GDP growth, the sentiment could turn bullish for the USD.
• Global Influence: The sentiment is also influenced by risk sentiment. For example, during times of uncertainty, like a financial crisis, investors tend to shift towards “safe-haven” currencies (like USD, JPY, and CHF), pushing sentiment negative for riskier currencies.
• Central Banks’ Influence: Central bank speeches and policy changes can have a huge impact on sentiment. Traders closely watch the tone and rhetoric of central banks (especially the Fed, ECB, BOJ, etc.) to predict how their future actions might affect the market.

2. Types of Sentiment Analysis

Understanding the different kinds of market sentiment is crucial when analyzing market behavior.

Bullish Sentiment:

• Definition: Traders expect the currency pair to increase in value. In a bullish market, there are more buyers than sellers.
• What Causes It: Positive economic indicators (e.g., a surprise interest rate hike, strong GDP growth), political stability, or positive sentiment in global markets.
• Impact: More buying pressure, leading to an upward movement in the currency pair.
• Example: A rise in oil prices may boost the Canadian Dollar (CAD), leading to a bullish sentiment around USD/CAD.

Bearish Sentiment:

• Definition: Traders expect the currency to decrease in value. In a bearish market, there are more sellers than buyers.