FX.co ★ The ECB and the Fed will have a tug-of-war in the near future

The foreign exchange market remains unsettled. Currently, everything doesn't just revolve around central bank interest rates, but now it is focused on expectations regarding those rates. Inflation in the European Union and the United States dropped below 3% in December, prompting the market to anticipate the central banks' first steps toward easing. Despite numerous statements from members of the Monetary Policy Committees of all three central banks, the market chose to ignore them, believing that if inflation is moving toward 2%, it's time to talk about rate cuts.

However, reality, as always, turned out to be much more pessimistic. In just a month, inflation in the EU went from "we're close to our target" to "we have a lot more to do." In the US, inflation could rise to 3.3% by the end of December. I've previously asked: how can the European Central Bank or the Federal Reserve think about rate cuts when inflation is rising?

As for the Bank of England, there's nothing to say at the moment. Inflation in the UK is actually higher and could also accelerate in the near future. However, all of this would be fine if the market took all the information into account. What do we have today? Neither the ECB, nor the Fed, nor the BoE have the necessary grounds to reduce rates in the near future. But the market continues to believe that the FOMC will lower rates in March, then cut them again in May, while the BoE and the ECB aren't expected to do so until summer. Therefore, demand for the pound and the euro remains relatively high, and the dollar is still seen as an outsider.

However, in the past week, the market started to doubt that the first rate cut in the United States will take place in March. This means that the dollar gains an additional advantage, as the market's dovish expectations start to diminish. However, at the same time, the latest eurozone inflation report also pushed the possible timing of the first rate cut to a later date.

Therefore, in the near future, the dollar and the euro (along with the pound) will be busy in a tug of war amid constantly evolving information that will impact market rate expectations.

Based on the analysis, I conclude that a bearish wave pattern is being formed. The pair has reached the targets around the 1.0463 mark, and the fact that the pair has yet to surpass this level indicates that the market is ready to build a corrective wave. Wave 2 or b has taken on a completed form, so in the near future, I expect an impulsive descending wave 3 or c to form with a significant decline in the instrument. An unsuccessful attempt to break the 1.1125 level, which corresponds to 23.6% Fibonacci, indicates the market is prepared to sell.

The wave pattern for the GBP/USD pair suggests a decline. At this time, I can recommend selling the instrument with targets below the 1.2039 mark because wave 2 or b will eventually end, and it could do so at any moment. In fact, we are already seeing some signs of it coming to an end. However, I wouldn't rush to conclusions and short positions. I would wait for a successful attempt to break the 1,2627 level, afterwards it will be much easier to expect the pair to fall further.