For the pound/dollar instrument, the wave marking looks quite complicated at the moment, but it does not require any clarifications yet. The upward wave, built between May 13 and May 27, does not fit into the overall wave picture, but it can still be considered corrective as part of the downward trend section. Thus, it can now be concluded that the downward section of the trend takes a longer and more complex form. I am not a big supporter of constantly complicating the wave marking when dealing with a strongly lengthening trend area. It would be much more appropriate to identify rare corrective waves, after which new clear structures will be built. At this time, we have completed waves a, b, c and d, so we can assume that the instrument has moved on to constructing wave e. If this assumption is correct, the quotes' decline should continue in the coming weeks. The wave markings of the euro and the pound differ slightly in that the downward section of the trend for the euro has an impulse form. However, the ascending and descending waves alternate almost the same way, and both instruments presumably completed the construction of their fourth waves simultaneously.
The rise in British inflation is not equal to the increase in the Bank of England rate
The exchange rate of the pound/dollar instrument decreased by 30 basis points on August 17. The decline in demand for the pound was due to the inflation report released this morning in the UK. The release showed that inflation rose from 9.4% y/y to 10.1% y/y and reached double digits for the first time in 40 years. However, personally, this acceleration does not surprise me at all. How can it be surprising if Andrew Bailey himself openly declared peak inflation of 13%, which the markets may see before the end of the year? Now the most important question for the pound is how the regulator will react to what is happening. The same Andrew Bailey has previously stated that price stability is a priority goal for the central bank, but so far, the tightening of monetary policy by 175 basis points has produced absolutely no result. To what value does the bank have the opportunity to raise the rate?
The market's reaction to increased inflation is also very interesting. The pound did not start the promotion as some might have expected. If earlier a new increase in inflation was identified with a new increase in the interest rate, now everything is not so. Many analysts doubt the ability of the Bank of England to raise the rate "as much as you want." At the next meeting, the forecasts for the rate are more than modest – most expect it to increase by 25 points. Thus, I would say that now the markets are more inclined to the "dovish" actions of the regulator and not the "hawkish" ones. And if this is true, then the demand for the pound will continue to decline and for the dollar to grow since the Fed does not face such a dilemma: raise the rate or not, fight inflation to victory or not. I still expect the pound/dollar instrument to decline.
General conclusions
The wave pattern of the pound/dollar instrument suggests a continued decline in demand for the pound. I advise selling the instrument with targets near the estimated mark of 1.1708, which equates to 161.8% by Fibonacci, for each MACD signal "down." An unsuccessful attempt to break through the 1.2250 mark indicates that the market is not ready for new purchases by the British.
The picture is very similar to the Euro/Dollar instrument at the higher wave scale. The same ascending wave does not fit the current wave pattern, the same three waves down after it. Thus, one thing is unambiguous – the downward section of the trend continues its construction and can turn out to be almost any length.
