The wave analysis for GBP/USD needs to be simplified and clarified. Around the level of 1.2822, which corresponds to 23.6% Fibonacci, and located near the peak of the presumed wave 2 or b, a downward wave began to form several weeks ago but didn't last long. I assumed this was the long-awaited wave 3 or c, but a failed attempt to break the level of 1.2627, which corresponds to 38.2% Fibonacci, pushed the instrument back to last year's highs. The entire wave structure is again threatened by transformation, but I can't say it's turning into an upward trend. No matter how the pound behaves, it has no medium-term growth potential. The dollar has regularly come under pressure in recent months due to American reports. If these reports were sometimes better than the market's expectations, we might already have seen the instrument below the 1.2600 figure.
However, the wave structure now requires clarification. As I mentioned, I do not see what could further increase demand for the pound, especially since the market did not find it necessary to complete the downward wave set. Yet, it is essential to reassess the wave picture impartially.
Demand for the Pound Continues to Grow
The GBP/USD rate increased by another 70 basis points on Thursday. Today, the only growth catalyst was the US inflation report, which showed a higher-than-expected slowdown. No one even paid attention to the morning statistics from the UK. The British GDP grew by 0.4% in May instead of the expected 0.2%, and industrial production volumes increased by 0.2%, matching the forecast. Thus, the market could have increased demand for the instrument in the morning but decided to wait for the more critical inflation report.
Since the current wave structure is broken, further increases in the instrument and the formation of an upward wave set can be expected. However, a downward reversal could still occur around the peak of the presumed wave 2 or b. When all market participants believe in the pound's strength, the opposite movement may occur. This is a hypothesis, but I still find it difficult to expect further gains in the pound sterling. The Bank of England is ready to move to a more "dovish" policy, while the Fed does not consider a 3% inflation rate sufficient to start easing in the coming months. The market situation is ambiguous now, but it has been like this for several months. The GBP/USD instrument needs to be more attractive for trading.
General Conclusions
The wave pattern of the GBP/USD instrument still suggests a decline, but it will likely be transformed shortly. I want to take my time with its transformation, which could lead to an error. Understanding how far up the market is willing to push the pound is necessary. If a new upward trend began on April 22, it has already acquired a five-wave form. Therefore, in any case, a minimum three-wave correction should now be expected.
The wave pattern is even more expressive on a larger wave scale. The downward correction wave continues to build, and its second wave has taken an extended form—76.4% of the first wave. A failed attempt to break this level could lead to the beginning of wave 3 or c, but a correction wave is currently being formed.
Basic Principles of My Analysis:
- Wave structures should be simple and understandable. Complex structures are challenging to trade and often change.
- If there is certainty about what is happening in the market, it's better to avoid entering.
- There is never 100% certainty in the direction of movement. Always use protective Stop Loss orders.
- Wave analysis can be combined with other types of analysis and trading strategies.
