24.05.202304:00 Forex Analysis & Reviews: The pound is overheated, and market expectations are hanging in the balance

In previous articles, I have explained why I expect a further decline from both the euro and the pound. Today, Commerzbank economists shared their opinion regarding the pound's prospects. Analysts said that the market is anticipating two more interest rate hikes in June and July, which may not align with reality. The Bank of England has already raised interest rates 12 times in a row, and with the two expected hikes, it would be a total of 14 times. The British central bank has not raised rates so aggressively in several decades. The economy, which has seen minimal growth in recent quarters, but may still show marginal growth for the year, will face increased pressure. Inflation will begin to decline, but it is unlikely to do so immediately. Commerzbank economists believe that the market is overestimating the BoE's capabilities, and expectations for the interest rate will have to be lowered, which will not support the pound's exchange rate.

The opinion of Commerzbank economists fully aligns with my own. However, I believe that the BoE will still raise the interest rate two more times. The current level of inflation is too high, and to retreat is not an option. However, the BoE will not raise the rate any higher. Bank of England Governor Andrew Bailey has stated several times that inflation will begin to decline from April, so the central bank will take a pause to assess the extent of inflation reduction based on the tightening measures that have already been implemented. I would even say that the rate will definitely increase at the June meeting, but then the central bank will take a pause and then wait for a "last resort" to implement another rate hike.

I think that all the news from the UK will not change the market sentiment. The market is already set up for a decline, and it's good that they also expect a downtrend for the euro. As I mentioned before, both instruments ideally should move in sync. There may be minor upward retracements, but I don't expect the pound to show significant growth.

I would also like to point out that the US Manufacturing PMI fell from 50.2 points to 48.5 points in May, causing a slight decline in the dollar. Industrial sectors in the UK, US, and the European Union are all facing serious problems. However, the US currency is unlikely to lose much because of this index. The US economy is doing much better than the UK or Europe, in spite of higher interest rates. At the same time, the Services PMI increased from 53.6 points to 55.1 points, which should help ease a bit of the weakness in the manufacturing sector. The UK will release an important inflation report on Wednesday.

Based on the analysis conducted, I conclude that the uptrend phase has ended. Therefore, I would recommend selling at this point, as the instrument has enough room to fall. I believe that targets around 1.0500-1.0600 are quite realistic. These are the targets I suggest for selling the instrument.

The wave pattern of the GBP/USD pair has long indicated the formation of a new downtrend wave. Wave b could be very deep, as all waves have recently been equal. The first wave of the upward phase may become even more complicated. Failure to breach the 1.2615 level, which corresponds to 127.2% Fibonacci, indicates the market's readiness for selling, while a successful attempt to break through the 1.2445 level, equivalent to 100.0% Fibonacci, confirms this signal. I recommend selling the pound with targets around 23 and 22 figures.