The European Central Bank policy decision is due Thursday. The euro approaches this important event with a less than favorable sentiment. Over the past two days, demand for the euro has steadily declined, and in general, demand has been decreasing for three months. According to the current wave count, this movement is entirely predictable. A recent three-wave upward corrective structure has ended, and a downward move has started. Based on this, I anticipate a continuation of the instrument's decline, regardless of the outcomes of the ECB meeting or the Federal Reserve's meeting next week. However, the corrective wave 2 or b may turn out to be three-wave or even five-wave. The ECB meeting could influence this. In this review, we will try to understand the Bank's potential decisions and statements.
The hawkish scenario: The ECB raises the interest rate by another 25 basis points, and ECB President Christine Lagarde speaks at the press conference about the need for further tightening of monetary policy and an increase in deposit holdings of those selling bonds to the Eurosystem. The probability of this scenario does not exceed 5%, but I believe that in reality, it is even lower. Over the past three months, ECB officials have suggested that there is no need for the Bank to continue raising rates. It seems that the entire Committee supports the scenario of keeping the rate at the current level for an extended period.
The dovish scenario: The ECB lowers the interest rate, and Lagarde mentions excessive pressure on an economy that is already on the brink of a recession. The likelihood of such an outcome is also not more than 5% because inflation is still far from the target, and repeated statements about keeping rates at the current level clearly indicate the impossibility of this scenario.
A neutral scenario means that the interest rate will remain unchanged. Lagarde says that the rate level is 'sufficiently restrictive', and the QT program continues to operate as before. This scenario does not anticipate significant strengthening or weakening of the euro. Although we might witness both temporarily.
Based on the analysis conducted, I conclude that a bearish wave pattern is still 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. 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. That's why I recommended selling. But we have to be cautious, as Wave 2 or Wave b may take on a more complex form, especially with the ECB meeting on Thursday.
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 wouldn't recommend longs because the corrective wave appears to be quite weak. In any case, it's a corrective wave. You can consider shorts if the pair successfully breaches the 1.2120 mark.