In the most global terms, the construction of a new downward section of the trend continues. The continued decline in quotes suggests the completion of the construction of wave 2 or b as part of this section, which has taken a rather shortened form. A successful attempt to break through the minimum of the expected wave 1 or a allows us to conclude that the markets are ready for further sales of the British dollar. The chart clearly shows the drop in demand for the British currency in recent weeks, which is caused by a whole list of various reasons and factors that will be discussed below.
During the last trading day, the GBP/USD instrument lost about 80 more base points. Thus, the construction of a new downward section of the trend continues within the expected wave 3 or C. A successful attempt to break through the level of 61.8% will lead to the conclusion that the markets are ready for further sales of the British dollar. The entire downward section of the trend can be very long. The demand for English currency is now almost zero.
First, the wave counting is now playing against the British. The upward section of the trend was formed within 5-6 months and took a 5-wave form. Therefore, the tool has now moved to build a downward trend section. Corrective or impulse, it doesn't matter, the British will fall.
Second, the Bank of England is increasingly talking and hinting at negative rates. Although Andrew Bailey, on the contrary, said this week that negative rates will not be applied in the near future, nevertheless, markets are confident that in 2020 or at the latest in early 2021, the regulator will have to reduce rates from the current 0.1%. This is also a negative factor for the pound.
Third, the coronavirus epidemic, which will again put pressure on the British economy, forcing it to shrink or slow down the recovery. Boris Johnson has already announced the start of the second wave of the pandemic. Quarantine measures will be tightened in the near future, which will again negatively affect the economic activity of the population. The new wave of coronavirus will almost certainly require a new stimulus from the Bank of England.
Fourth, Brexit, which will be completed on December 31, 2020. The UK will officially leave the EU without a trade agreement (the probability of this is 99%) and, therefore, will trade in the new year according to the rules and regulations of the WTO, that is, with tariffs and duties, which will hit both British and European companies. However, we are now talking about the British pound, so the demand for this currency may fall due to Brexit.
Fifth, the bill "on the domestic market", which was the main reason for the first downward wave for the British. If it is passed, and Boris Johnson does violate the agreement with the EU, there is no doubt that sanctions will follow. Further, it is unlikely that these sanctions will have a positive impact on the British economy.
General conclusions and recommendations:
The pound/dollar instrument presumably completed the construction of the upward wave Z and the entire upward trend section. At the same time, there is a high probability of building a correction wave 2 or b, which could also have already completed its construction near the level of 38.2%. An unsuccessful attempt to break this mark allows the markets to start selling the instrument with targets located around 1.2721 and 1.2539, which is equal to 61.8% and 76.4% according to Fibonacci, based on the construction of the third wave.
