FX.co ★ Analysis of GBP/USD. October 10th. High wage growth rates are the main problem of the Bank of England and the pound

The wave analysis for the GBP/USD pair remains quite simple and clear. The construction of a new downtrend phase continues with its first wave, which is taking a long time. In my view, the British pound has no grounds to resume its rise, so I do not even consider the scenario of a new upward phase. The first wave of the downtrend phase has already taken on a very extended form, but demand for the pound continues to remain low. I would like to remind you that there are no specific target sizes for the waves. The first wave can be constructed for as long as necessary without any restrictions.

The internal wave structure of the first wave of the new trend segment looks complex, and it is difficult to discern five waves in it. However, five waves are visible in the euro currency. If the construction of the bearish wave set is completed for the euro currency, then there is an 80% probability that it will also be completed for the pound. In the case of the euro, the first wave is already complete with a high degree of probability. Demand for the pound has also been increasing in recent days, so in the near future, I expect the construction of wave 2 or b.

Pressure on the pound may intensify.

The GBP/USD pair rose by 25 basis points on Tuesday, which is very little. The total departure of quotes from last week's lows is now about 220 points. This is a significant move, but it is still not enough to be confident in the construction of wave 2 or b. Personally, I believe that this wave has begun for both pairs because the first wave has already taken on an overly extended form. However, in any case, trading within the framework of the second correction wave is not advisable. It is better to wait for its completion to enter the market with new sales as part of the third wave. However, even here, things are not so simple: wave 1 or a has a length of 1100 points, so the correction wave can have a length of 500–600 points. Therefore, the pair may move up another 300–400 points before starting a new decline.

Commerzbank analysts have presented an interesting analysis of the markets, which relates to inflation, Bank of England rate decisions, and wages. If we take the essence of this analysis, one of the main problems in the UK is still the high wage growth. Analysts note that in recent months, inflation in Britain has indeed slowed down, but wage growth and rising energy prices could have a detrimental effect on inflation. Analysts believe that the Bank of England is not doing everything necessary to slow inflation down to the target level of 2%. The market also holds this view, which can exert additional pressure on the British currency. From my perspective, the Bank of England cannot raise the rate further due to the very real threat of a recession, but essentially, these two conclusions are the same.

General Conclusions:

The wave pattern of the GBP/USD pair suggests a decline within a new downtrend phase. The maximum that the British pound can expect in the near future is the construction of wave 2 or b. However, as we can see, even with a correction wave, there are significant problems at the moment. Currently, I would not recommend new sales, but I also do not advise buying, as the correction wave may turn out to be quite weak.

On the higher wave scale, the picture is similar to the euro/dollar pair, but there are still some differences. The downtrend correction phase continues to develop, and its first wave has already taken on an extended form and is definitely not related to the previous upward phase.