The long-suffering pound and the hopeless euro
April 19, 2023 3:22 pmVideo
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In recent weeks, as demand for the euro and the pound has grown strongly, many analysts have begun to talk about the excellent prospects for both currencies in the long term. The first thing I would like to draw readers’ attention to is the high probability of completing upward waves or sets of waves around the peaks of the latest upward trend sections. What does this mean? The euro and the pound rose at the end of last year, then corrective sets of waves were built, and then new upward sections could be expected, but instead, we saw new corrective structures. The market is reluctant to continue pushing the British and European currencies upward. Not least because of the weak news background, which many analysts, for some reason, consider strong.
Let’s figure it out. The demand for the dollar began to fall in the middle of last year when it became clear that inflation was starting to slow down and the Federal Reserve would not raise the rate by 50 basis points at each meeting. For a long time, demand for the US currency grew due to the aggressive monetary policy of the Fed, but at some point, it had to be replaced with a moderate one. When the market began to realize that this moment was close and the Bank of England and the ECB, on the contrary, would accelerate the pace of rate hikes, that was the turning point, thanks to which the euro and the pound gained in the last three quarters. However, now we are witnessing the reverse situation. It is obvious to everyone that neither the Bank of England nor the ECB can raise the rate to 5–6%. We are talking about one or two more increases. Each subsequent increase will be of an “emergency” and unplanned nature. Remember that demand for the US currency began to decline long before the Fed slowed down the pace of rate hikes. Now the market is expecting the completion of tightening programs from all three banks. If earlier demand for the euro and the pound grew because the market expected a stronger rate hike from their central banks, now this dependence no longer works.
Based on everything mentioned above, either the euro or the pound must receive new support from the news background, or demand for them should decrease, as the market has no reason to continue increasing it. Both pairs will only move horizontally briefly, so the most logical scenario is a decline. I want to say separately about economic statistics, which are better in the US than in the UK or the EU. Inflation is falling faster in the US, and the economy is stronger. Not to mention the labor market and unemployment. In the European Union, unemployment is twice as high. In the UK, it is simply higher. And economic growth in the UK and the EU have been almost absent in recent quarters.
The formation of the upward trend section is complete based on the analysis. Therefore, I recommend selling, as the pair has a lot of room for decline. The target of 1.0600 can be considered quite realistic. With this goal in mind, I advise selling the pair on the reversals of the MACD indicator “down” until the quotes successfully attempt to break through the 1.1030 level, which may not happen.
The wave pattern of the pound/dollar pair suggests the formation of a new downward wave. The wave marking is now ambiguous, as is the news background. I do not see factors supporting the British currency in the long term, and wave b can be very deep. A decline in the pair is more likely now, as all the waves recently have been roughly the same size. Trading can be done at the 1.2440 mark, which corresponds to 0.0% according to Fibonacci. Below it – we sell with targets 300-400 points lower; above it – we cautiously buy.
The material has been provided by InstaForex Company – www.instaforex.com
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