The news background on Wednesday and Thursday was extensive for both pairs. Although we only received the business activity index from the UK, which could not have impacted market sentiment, there were many different events and news in the European Union and the US. It's impossible to fit everything into one article. Therefore, I suggest analyzing the minutes of the May ECB meeting, which became available today, in addition to the inflation report in the EU and Christine Lagarde's speech.
The main points of the minutes were as follows. First, some committee members initially supported a 50 basis point rate hike. If half a percent had eventually raised the rate, it would have been a complete surprise to the market, as it is a very illogical action for the regulator: first, reduce the rate hike increment to 25 basis points and then raise it by 50. However, during the meeting, all committee members agreed to the proposal to raise the rate by only 25 basis points.
Second, all committee members supported the view that further tightening monetary policy is necessary. Inflation remains high, and ECB measures must be sufficiently restrictive to ensure a decrease in inflation to 2%. Christine Lagarde also mentioned the same in her speech today.
Third, many committee members wanted to return to clear rate hike targeting. It was proposed to abandon "meeting-to-meeting decision-making," but what decision was ultimately made on this matter is unknown. ECB members also agreed that the balance sheet should continue to be unwound, and this would not shock the markets (referring to the QT program - the sale of securities from the ECB's balance sheet). However, according to the committee, there is no need to rush with this program.
Fourth, it was concluded that the long-term inflation forecast has risen above 2%, which may require additional actions from the regulator. I believe the minutes can be considered "hawkish," which could increase demand for the euro on Thursday.
After the release of the inflation report for May (which could not be taken into account at the last ECB meeting), analysts sharply lowered their rate expectations for 2023. Many said they expect another rate hike in June, after which the tightening program will be completed. There may be 1-2 more rate hikes, but in any case, the ECB is nearing the end of the rate hike cycle. In this regard, the statements of many ECB officials seem "overly optimistic." There needs to be a clear mismatch between the rhetoric of ECB members and market expectations.
Based on the analysis conducted, the upward trend phase has been completed. Therefore, selling is advised now, and the pair has ample room for decline. I still consider targets around 1.0500-1.0600 quite realistic, and I recommend selling the pair with these targets. From the 1.0678 level, a corrective wave could start (or may have already started), so I suggest new sales in case of a successful breakthrough of this level.
The wave pattern of the pound/dollar pair has long suggested the formation of a downward wave. Wave b could be very deep since the recent waves have been approximately equal in length. However, the successful attempt to break the 1.2445 level, which corresponds to 100.0% Fibonacci, indicates the market's purchase readiness, which could disrupt the current scenario. Therefore, I recommend selling the pound with targets around the 23 and 22 figures, but now we must wait for signals to resume the downward wave.
