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The wave analysis of the pound/dollar pair remains quite convincing. During the last several weeks, the instrument has been forming an upward wave, which is now considered wave D of the downward section of the trend. If the current wave structure is true, the quote is likely to resume falling after the wave finishes its formation. In fact, this could have happened last Friday. Thus, the downward section of the trend could become longer. Notably, the instrument has started the formation of wave E. However, wave D could consist of five waves. In this case, it should be considered an impulsive wave. If it is true, the wave analysis should be revised. At the moment, there are three waves within wave D. They could form a series of a-b-c. A successful attempt to break the level of 1.3644, the 38.2% Fibonacci level, points to traders' readiness to sell the pound sterling. Importantly, the euro/dollar pair may also start the construction of a new downward wave. It means that these two instruments will hardly have a conflict.
UK inflation continues to accelerate
On January 19, the pound/dollar pair added 35 pips. After a three-day decline, the instrument formed an upward corrective wave that could be a part of the future wave E. However, it could also act as the fourth wave in wave D. In this case, wave D will consist of five waves. The UK inflation report was the only important data published on Wednesday. In December, inflation continued rising and hit 5.4% on a yearly basis, whereas analysts had expected the reading of 5.2%. The report was disclosed early in the morning. After that, the British pound began falling. However, just in one hour, the currency resumed gaining in value, adding 50 pips. Thus, we can say that traders priced in the information. However, the future of the British pound is still rather gloomy. Firstly, the wave structure points to a highly possible drop. Secondly, the news flow will hardly support demand for the currency for a long time. The pound sterling needs further tightening of the BoE's monetary policy. The fact is that there will hardly be any other reasons for a rise. In the UK, everyone is focused on Boris Johnson, who may resign this year. In addition, most analysts take into account the UK political crisis. It is still unknown how this crisis may affect the economy, which has already suffered greatly from Brexit and the pandemic. So far, it seems that the pound sterling has shown the best performance under the current conditions. However, we need to track the market's reaction to the Fed's meeting. There could be some unpleasant results.
Conclusion
The wave structure of the pound/dollar points to the end of the wave D formation. I expect a new downward wave E. A successful attempt to break the level of 1.3641 may allow the instrument to hit such levels as 1.3458 and 1.3271, which stand for the 50.0% and 61.8% Fibonacci levels respectively.
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