22.03.2023 07:53 PM
GBP/USD. Analysis for March 22. British inflation is rising again

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The wave analysis for the pound/dollar pair now appears to be challenging but does not call for any clarifications. The wave patterns for the euro and the pound differ somewhat, but both point to a decrease. Our five-wave upward trend section has the pattern a-b-c-d-e and is most likely already finished. I anticipate that the downward trend's development, which will at least take the form of three waves, is currently ongoing. Since the pair fell below wave a's low, even if only by a few points, wave c has grown and can already be finished. Of course, I anticipate a more pronounced decrease in British quotes, but it should be emphasized that forecasts do not always match reality. The trend's downward segment, which started on December 13, may very possibly turn the pair into a five-wave corrective, but it may also be over. There have been several factors driving up the demand for the pound recently. The downward trend could continue at any time, although the current rise in quotes could be wave d of a section of a downward trend.

UK statistics were disappointing.

On Wednesday, the pound/dollar pair's exchange rate rose by 10 basis points, but the amplitude was significantly higher. Today, the UK saw the release of one of the most significant recent reports: an inflation report. The index unexpectedly showed a new increase and reached 10.4% y/y in February, contrary to the markets' expectations for a decrease. Thus, despite ten increases in the Bank of England rate, it was not possible to go below the 10% level. The market initially saw a surge in demand for the British pound since it was rationally believed that the Bank of England would have to tighten its monetary policy even further. Demand, however, started to decline in the afternoon because the Fed meeting's results, where surprises are potentially likely, will be summarized in a few hours.

What does Britain's recent increase in inflation mean?

First, the Bank of England is unable to control it. Both an increase in the rate and a decrease in the cost of energy is ineffective. Second, there should be strong evidence for future rate hikes. The economy will likely collapse if the rate is increased to twice its current level. Since the British regulator would not take such action, the UK is destined to experience high inflation for an extended period. Further raising the rate doesn't make much sense in light of these developments, because why put more strain on the economy by doing so if inflation isn't going down at the same time? What difference does it make if inflation is 10% or 15%? Based on this, the Bank of England meeting tomorrow will be very significant since a response to the new inflation report should happen.

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Conclusions in general.

The development of a downward trend section is implied by the wave pattern of the pound/dollar pair. When the MACD signal reverses to the "down" position, it is reasonable to consider sales with targets around the 1.1641 level, or 38.2% per Fibonacci. The peaks of waves e and b could be used to place a Stop Loss order. Despite the possibility that wave c has already been finished, in this event, I anticipate the development of declining wave e with targets once again 400–500 points below the present levels.

The image resembles that of the euro/dollar pair at higher wave scales, but there are still minor differences. The upward correction part of the trend has now been completed. If this presumption is true, then we should expect the downward part to continue to be built for at least three waves, with the possibility of a decline in the area of 14–15 figures.

Chin Zhao,
Analytical expert of InstaForex
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