The wave pattern for GBP/USD has become quite complex and ambiguous. For some time, the wave structure seemed convincing and suggested the formation of a downward series of waves with targets below the 1.2300 level. However, in practice, demand for the U.S. dollar grew too strongly to realize this scenario, and it continues to increase.
At this point, the wave structure has become completely unreadable. I remind you that in my analysis, I prefer to use simple structures because complex ones often contain too many nuances and ambiguities. Currently, we see an upward wave that overlaps a downward wave, which in turn overlaps a previous upward wave, which again overlaps a previous downward wave (all these waves are within a triangle). The only assumption that can be made is an expanding triangle with a peak around the 1.3000 level and a balancing line around the 1.2600 level. However, another upward wave that doesn't fit any wave pattern has taken the quotes above the triangle. The alternative wave count is presented in the lower chart.
The Market Has Found a New Reason to Buy
The GBP/USD pair rose by another 35 points on Tuesday. The rise in the pound continues unabated, even on days when the news background is absent and a corrective wave is needed. Today, there were no news releases in the UK or the US, but even that didn't stop buyers. A successful attempt to break the 1.3139 level, corresponding to the 100.0% Fibonacci level, indicates the market's readiness to continue buying the pair with targets around the 1.3439 level.
Meanwhile, the market finally remembered that it wasn't just Powell who spoke at the Jackson Hole symposium on Friday; Bailey also took the stage. In short, the BoE governor expressed continued concerns about core inflation and inflation in the services sector. The market interpreted this as meaning that the Bank of England might reduce rates more slowly than the Fed. In other words, the market has labeled Mr. Bailey as "not dovish enough" and decided that such statements from the central bank governor are not enough to reduce demand for the British pound.
As a result, demand for the pound may continue to increase, as the market has found a new reason to buy. The Bank of England has begun easing policy but will reduce rates much more slowly in the future. Why? Because inflation in the UK is at 2.2%, while in the U.S., it's at 2.9%? It seems there is no logical connection here. In my opinion, the BoE has every reason to conduct easing faster than the Fed. But how can this be convinced to a market that now expects rate cuts at all three remaining meetings in 2024?
General Conclusions
The wave pattern for GBP/USD suggests a possible decline. If the upward trend began on April 22, it has already formed a five-wave pattern. Therefore, in any case, a minimum three-wave correction should now be expected. In my view, sales should be considered in the near future with targets around 1.2627, which corresponds to the 38.2% Fibonacci level, and lower. However, there are no signals yet indicating the completion of the upward wave.
On the larger wave scale, the wave pattern has transformed. Now, we can assume the development of a complex and extended upward corrective wave pattern. At the moment, this is a three-wave pattern, but it could evolve into a five-wave structure, which could take several more months, or even longer, to complete.
Basic Principles of My Analysis:
- Wave structures should be simple and understandable. Complex structures are difficult to trade and often change.
- If you're not confident about what's happening in the market, it's better not to enter.
- There is never 100% certainty in the direction of movement. Don't forget about protective Stop Loss orders.
- Wave analysis can be combined with other types of analysis and trading strategies.
