The wave analysis for the GBP/USD pair remains quite complex. A successful attempt to break through the Fibonacci level of 50.0% in April indicated the market's readiness to build a downward wave 3 or C. If this wave continues to develop, the wave pattern will become much simpler, and the threat of complicating the wave count will disappear. However, in recent weeks, the pair's decline has been absent, which again raises doubts about the market's readiness for sales.
As I have already noted, the wave pattern should be simple and understandable to work with. For a long time, the pair was in a sideways trend, and only now is there an opportunity to build an impulsive downward wave. However, wave structures remain very complex, with many corrective waves.
In the current situation, my readers can still count on the construction of wave 3 or C, the targets below the low of wave 1 or A at 1.2035. Therefore, the pound should decline by at least 600–700 basis points from current levels. With such a decline, wave 3 or C will be relatively small, and I expect much larger declines in quotes. However, it may take a lot of time to build the entire wave 3 or C. Wave 2 or B lasted five months.
Demand for the pound continues to rise despite everything.
The GBP/USD pair rose by 55 basis points on Wednesday. The increase in quotes began in the first half of the day, although there was no news background during this period. At the beginning of the American session, the US inflation report was released, which added another nail to the coffin of the dollar and the current wave pattern. American inflation slowed down in April from 3.5% to 3.4% year-on-year. Core inflation slowed from 3.8% to 3.6% year-on-year. In both cases, the indicators coincided with market expectations. The retail sales report was weaker than expected, showing 0% m/m instead of the forecasted 0.4%.
Did the market have the right to reduce demand for the dollar today? It did. This is exactly what I mentioned in the EUR/USD review. The market increasingly uses formal reasons to sell the dollar. Did inflation slow down in the US? This means the Fed is getting closer to the first round of monetary policy easing. And it doesn't matter that both inflation indicators matched market expectations, meaning they were already priced in. Was the retail sales indicator worse? No problem! The market will ignore it – and that's it! We encounter such moments constantly. On Tuesday, the unemployment rate in the UK rose unexpectedly, but the pound still strengthened by the end of the day. Jerome Powell stated yesterday that the Fed's policy will remain "hawkish" for long, but the market preferred to disregard this news.
General conclusions.
The wave pattern of the GBP/USD pair still suggests a decline. At this time, I am still considering selling the pair with targets below the 1.2039 mark, as wave 3 or C has not been canceled yet. An unsuccessful attempt to break through the 1.2625 mark, which is equivalent to 38.2% Fibonacci, will indicate the completion of the internal corrective wave in wave 3 or C, but there is a chance that buyers will push it through.
On the larger wave scale, the wave pattern is even more eloquent. The downward corrective section of the trend continues to develop, and its second wave has taken on an extended form – to 76.4% of the first wave. An unsuccessful attempt to break through this mark could have led to the beginning of the construction of wave 3 or C, but currently, a corrective wave is being formed.
The main principles of my analysis:
- Wave structures should be simple and understandable. Complex structures are difficult to play, as they often change.
- If one is not confident in the market's performance, it is better to avoid entering it.
- There is never a hundred percent certainty about the direction of movement. Do not forget about Stop-Loss protective orders.
- Wave analysis can be combined with other types of analysis and trading strategies.
