FX.co ★ Analysis of GBP/USD pair on September 18, 2024

The wave pattern for GBP/USD remains complex and ambiguous. For some time, the wave pattern looked convincing, suggesting the formation of a downward wave sequence with targets below the 1.2300 level. However, in practice, the demand for the British pound has grown too strong for this scenario to materialize. Moreover, the growth continues.

Currently, the wave pattern has become complicated. I prefer using simple structures in my analysis, as complex ones have too many nuances and ambiguities. We have now seen another upward wave, which has pushed the pair outside the triangle. The current upward wave sequence, which likely began on April 22, could extend even further, as it seems the market will not calm down until all phases of the Fed's rate cuts are priced in. In recent weeks, a three-wave corrective structure has formed, which could be a correction within the overall upward trend. If this is the case, the rise in quotes could continue for several more months.

The GBP/USD rate rose by 50 points on Wednesday. The sole reason for the renewed demand for the pound was the U.K. inflation report for August. The headline Consumer Price Index remained unchanged at 2.2% year-on-year, but core inflation accelerated from 3.3% to 3.6%. Core inflation was the main factor that strengthened the British currency, as the market is now 100% certain that the Bank of England will keep its monetary policy unchanged tomorrow.

Once again, a strange situation has arisen in the U.K., and the Bank of England has become its hostage. Headline inflation has slowed to 2.2%, suggesting the need for policy easing. However, at the same time, core inflation is far from the target and is rising again. The Bank of England cannot afford to lower interest rates further due to core inflation. For the pound, this is excellent news. The longer the BoE maintains a hawkish monetary policy, the better it is for the pound. Meanwhile, the Fed is likely to cut rates at every meeting, and the Fed's rate could fall below the Bank of England's rate. In my opinion, the pound has already surpassed growth expectations, and the market has priced in several rounds of easing by the FOMC. Therefore, this does not mean that the pound will continue to rise as long as the Fed transitions to a more dovish policy. But it does mean that the GBP/USD pair has gained additional fuel for growth in the near term.

General Conclusions

The wave pattern for GBP/USD still suggests a decline. If the upward section of the trend began on April 22, it has already taken on a five-wave form. The corrective wave has also formed a three-wave pattern, but in my view, it is too small to expect a new upward trend now. I still consider selling the instrument more attractive, but now we need clear signals. Today and tomorrow, the news background will be very strong, which could lead to sharp movements in any direction.

On the larger wave scale, the wave pattern has transformed. Now, we can assume the formation of a complex and extended upward corrective structure. At the moment, it is a three-wave structure, but it could develop into a five-wave structure, which may take several more months or even longer to form.

Key Principles of My Analysis:

1. Wave structures should be simple and understandable. Complex structures are difficult to trade and often subject to changes.
2. If you're uncertain about the market situation, it's better to stay out.
3. There is never 100% certainty in the direction of movement. Don't forget to use protective Stop Loss orders.
4. Wave analysis can be combined with other types of analysis and trading strategies.