I haven't talked about the US or EU economies recently, although, in my opinion, it's obvious whose economy is stronger. A strong economy is the key to a strong currency. If we look beyond the past year, the US dollar has been growing stronger for 16 years already. Against the euro, the dollar started rising from the 1.60 level, and against the pound, it started from 2.10. It's worth noting that over these 16 years, the dollar has grown by one and a half times against the euro and doubled against the pound. And it's not just about third-rate currencies, whose perpetual decline is expected because their economies clearly lag behind. Therefore, even a year-long decline for the dollar is nothing more than a corrective phase, and the trend has been bearish for 16 years.
Currently, the EU economy is going through challenging times. First, there was the pandemic, then the conflict in Ukraine, rising inflation after all the stimulus programs, and the move away from Russian gas and oil. All of this is hitting the alliance, which mainly imports energy resources and is required to consider the interests of all member countries. Economic growth in Europe has been practically non-existent in the past year. Only one quarter closed with growth over 0.1%, while one quarter was in the negative. The European Central Bank interest rate has increased noticeably, albeit not excessively, which is enough to exert pressure on economic growth. The European Union wanted to achieve a slowdown in economic growth because there are no other ways to lower inflation. This is why interest rates are being raised. However, the flip side of the coin is a recession.
Eurozone PMIs have been released. The Manufacturing PMI has been below the key 50 mark for over a year, while the services sector has been below it for two months. But these values suggest further economic slowdown. After the release of this data, Hamburg Commercial Bank made a statement about the possible start of a recession in the EU in the second half of the year. The recession is unlikely to be severe, but it will depend on the ECB's future course of actions. At present, the process of tightening has been put on hold, but that doesn't mean it can't resume. If inflation were to accelerate significantly once again (which is also possible), there could be new rate hikes, putting even more pressure on the European economy.
Based on the analysis conducted, I conclude that a bearish wave pattern is currently being formed. The pair has reached the targets around the 1.0463 level, and the fact that the pair has yet to break through this level indicates that the market is ready to build a corrective wave. In my recent reviews, I warned you that it is worth considering closing short positions. A successful attempt to break through the 1.0637 level, which corresponds to the 100.0% Fibonacci level, would indicate the market's readiness to complete the formation of Wave 2 or Wave b. In this case, I recommend new shorts. Be cautious at first, as Wave 2 or Wave b may take on a more complex form, especially with the ECB meeting this week.
The wave pattern for the GBP/USD pair suggests a decline within the downtrend segment. The most that we can expect from the pound in the near future is the formation of Wave 2 or b. However, there are currently significant issues, even with the corrective wave. At this time, I would not recommend new short positions, but I also do not recommend longs because the corrective wave appears to be quite weak. In any case, it's a corrective wave.
