FX.co ★ Analysis of GBP/USD pair on May 20th

For the GBP/USD pair, wave analysis remains quite complex. A successful attempt to break through the Fibonacci level of 50.0% in April indicated the market's readiness to build a downward wave 3 or c. If this wave continues to develop, the wave pattern will become much simpler, and the threat of complicating the wave analysis will disappear. However, in recent weeks, the pair's decline has been absent, prompting doubts about the market's readiness for sales. The downward wave 3 or c could be very extensive, like all previous waves of the current, but it is still a downward trend segment.

In the current situation, my readers can still count on wave 3 or c formation, the targets of which are located below the low of wave 1 or a, at the level of 1.2035. Therefore, the pound should decline by at least 600–700 basis points from current levels. With such a decline, wave 3 or c will be relatively small, so I expect a much larger decline in quotes. It may take a lot of time to build the entire wave 3 or c. Wave 2 or b took five months to form, and it was only a corrective wave. Building an impulse wave may take even more time.

Monday passes without changes.

The GBP/USD pair remained unchanged throughout Monday, and the range of movements when writing the review is ten basis points. This means that there were no movements today. This is consistent with the news background, which was also weak today. Nevertheless, I cannot mention Ben Broadbent's speech stating that the Bank of England could start lowering interest rates as early as this summer. Undoubtedly, he also mentioned that everything would depend on the incoming data, hinting that inflation may not be as positive as the markets and the Bank of England expect.

And the market's positivity and optimism are overwhelming right now. According to forecasts, inflation in Britain may slow to 2.1% in April annually, which may be known as early as Wednesday. At the same time, core inflation may decrease to 3.6%. If this forecast is true, the Bank of England could move to a more "dovish" policy in June or August. Inflation could be higher than 2.1%, but such an optimistic forecast alone means we are in for a very strong slowdown, as the current inflation rate is 3.2%.

Based on the above, I still expect a decline in demand for the pound. The Fed will start easing in the fall and more likely - in winter. Therefore, sellers may take the initiative in the market for the next few months.

General Conclusions.

The wave pattern of the GBP/USD pair still suggests a decline. At this time, I am still considering selling the pair with targets below the 1.2039 level, as wave 3 or c has yet to be canceled. A successful attempt to break through the 1.2625 level, which equates to 38.2% Fibonacci, from above will indicate the possible completion of the internal, corrective wave within 3 or c, which looks like a classic three-wave structure.

On a larger wave scale, the wave pattern is even more eloquent. The descending correctional trend segment continues to develop, and its second wave has acquired an extended form - to 76.4% of the first wave. An unsuccessful attempt to break this level could have led to the beginning of the construction of 3 or c, but at this time, a corrective wave is being built.

The main principles of my analysis:

1. Wave structures should be simple and understandable. Complex structures are difficult to play with, often bringing changes.
2. If there is confidence in what is happening in the market, it is better to avoid entering it.
3. There is never 100% certainty in the direction of movement. Remember protective stop-loss orders.
4. Wave analysis can be combined with other types of analysis and trading strategies.