While the euro and the pound are in a depressed state, the dollar is simply thriving. Demand for the American currency is steadily rising, as the market currently has more faith in the escalation of the military conflict in the Middle East, a prolonged closure of the Strait of Hormuz, and a new rise in energy prices than in positive scenarios. Additionally, expectations for the Federal Reserve's monetary policy have begun to shift towards a "hawkish" stance, which may also support the dollar. It is important to understand this shift correctly. So far, it is only about a 10-15% chance of one round of tightening policy by the end of the year. This means that the likelihood of at least one rate hike at the next five FOMC meetings is less than 50%. However, just a week ago, the market did not believe in even one tightening and was awaiting a return to easing around December.
Therefore, next week it will be important to understand the Fed governors' perspective on this matter. There are very few economic news reports expected in the US, and the FOMC minutes—so-called "Fed minutes"—are always more of a formality than a source of important information. The minutes are released with a three-week delay, and during those three weeks, the situation usually changes so much that the information contained in the minutes becomes outdated. Right now, we are in such a situation. Three weeks ago, the market expected the conflict in the Middle East to be resolved and a gradual slowdown in inflation, but now it expects further escalation and a new rise in consumer prices that could force the Fed to tighten policy by the end of the year. The market wants to hear the "fresh" views of the FOMC governors to gauge how justified the "hawkish" expectations are.
From the economic events in the US, I would not highlight anything significant. All reports next week are routine and will have no impact on the Fed or on inflation. Therefore, next week, the US dollar's fate will depend on the speeches of FOMC governors and the geopolitical situation in the Middle East.
Wave Picture for EUR/USD:
Based on the analysis of EUR/USD, I conclude that the instrument remains within an upward segment of the trend (bottom image) and, in the short term, within a corrective structure. The corrective wave set a-b-c appears to be complete. Therefore, wave 3 in C might have begun, with targets extending to the 14th figure. If the current wave count is correct, the entire wave C could complete its structure much lower than the 14th figure. However, such a scenario would require strong geopolitical support.
Wave Picture for GBP/USD:
The wave picture for the GBP/USD instrument has become clearer over time. We can now see a distinct upward structure on the charts that is complete. Thus, I expect the formation of a downward wave set that may take on an impulsive nature and coincide with the impulsive structure of the EUR/USD instrument. Consequently, after a 300-point decline, a corrective wave can be anticipated, followed by a new drop to the 30-31 figures. I previously alerted about a new decline for the pound but expected a correction. However, the harsh reality shows that this may manifest as a full-fledged impulsive structure, considering the strength of its first wave.
Key Principles of My Analysis:
- Wave structures should be simple and clear. Complex structures are difficult to trade and often involve changes.
- If there is no certainty about what is happening in the market, it is better not to enter it.
- There can never be 100% certainty in market direction. Remember to use protective Stop Loss orders.
- Wave analysis can be combined with other forms of analysis and trading strategies.
