FX.co ★ Analysis of GBP/USD on December 20, 2023

For the pound/dollar pair, the wave analysis remains quite clear, but it continues to become more complicated. The construction of a new downtrend is ongoing, the first wave of which has taken on quite extensive form. The second wave has also been quite prolonged, giving us every reason to expect a long construction of the third wave.

At the moment, I am not confident that the construction of wave 2 or b is complete. The retreat of quotes from the peaks reached needs to be bigger to consider it a guaranteed start of wave 3 or c. The rise in the pound quotes during the Bank of England and Federal Reserve meetings led to a significant increase, and now wave 2 or b has taken on a five-wave form. However, it still remains corrective and should be completed shortly. Targets for lowering the pair within wave 3 or c are located below the level of 1.2039, which corresponds to the low of wave 1 or a.

Unfortunately, the wave analysis tends to be complicated, and the news background needs to pay more attention to the wave pattern and try to correspond to it. At the moment, I do not abandon the working scenario, but there is a danger of transforming the entire wave structure.

The inflation report brought the pound down to earth.

The exchange rate of the pound/dollar pair decreased by 80 basis points on Wednesday. Yesterday, it increased by 100. And now, let's make a small comparison. On Tuesday, there were no economic events in the UK, only secondary ones in the US. Today, an important inflation report was released in the UK, which unequivocally indicated a decline in the pound. The British currency fell, but even less than it had risen the day before when there was no reason for the market to demand it. This example perfectly illustrates the current mood of the market. It is ready to continue increasing demand for the pair, even without economic reasons.

The inflation report in the UK means a reduced likelihood of a rate hike, as Andrew Bailey mentioned after the meeting last week. If the market bought the pound last week based on the high probability of another policy tightening, this high probability has evaporated. Demand for the pound has decreased, but it has decreased too weakly to speak of a transition to wave 3 or c construction. A successful attempt to break through the level of 1.2627, which is equivalent to 38.2% according to Fibonacci, will more accurately indicate the market's readiness for the construction of a downtrend.

By the end of the week, we are waiting for several more interesting reports, in particular, on GDP in the UK and the US, but they will have less impact on the market. Optimists can now expect strong growth from the British economy, so the pound will not be able to gain support.

General conclusions.

The wave pattern of the pound/dollar pair suggests a decrease within the descending wave 3 or c. Currently, I recommend selling the pair with targets below the level of 1.2039 because wave 2 or b must ultimately be completed and can be completed at any time. And the longer it turns out, the stronger the fall of the British pound will be. The peak of the presumed wave e in 2 or b can be used for sales, and the order limiting possible losses for transactions can be placed above it.

The picture is similar to the euro/dollar pair on the larger wave scale, but there are still some differences. The descending corrective trend continues its construction, and its second wave has already taken on an extensive form - 61.8% of the first wave. An unsuccessful attempt to break through this level may lead to the start of the construction of 3 or c.