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In global terms, a new downward trend section continues to be built. The quotes leaving the lows reached suggests the construction of wave 2 as part of this section. Thus, the growth of quotes may continue to the area of 32 and 33 figures, as the decline in wave 1 was quite strong. As in the case of the euro, the news background is now very important for the pound. If a surge of disappointing news resumes from the UK, the demand for the pound may fall again, which will lead to a resumption of the decline in the instrument's quotes as part of a new impulse downward wave.
Yesterday, the GBP/USD pair gained about 75 basis points. However, an unsuccessful attempt to break through the 38.2% level suggests that the decline may resume today, and the entire wave 2 or b will take a very shortened form. If this is true, the pound will start to get cheaper again. However, much will depend on the Bank of England today. The pattern wave 2 or b can take a three-wave form, but wave 1 or a does not look like a strong five-wave. Thus, the probability of a new decline is very high.
The UK's news background remains negative as a whole. There are no new reports regarding Brexit, Northern Ireland minutes, the actions of Parliament or Boris Johnson. Thus, the pound has been gradually recovering recently, and only yesterday's FOMC meeting and Jerome Powell's rhetoric led to a new decline in the instrument's quotes. A report on British inflation was also released yesterday, which dropped from 1.0% y/y to 0.2% y/y. At the same time, the forecasts were even lower, but exceeding these forecasts would not support the pound, as inflation dropped significantly. Today, the markets will find out BoE's decision during a meeting of its monetary committee, however, they do not expect it to change the parameters of monetary policy. Most likely, the regulator will leave all the influence on the economy at the very last moment, since it is now completely unclear what relations between the UK and the European Union will develop in 2021. There will probably be no trade agreement, but there may be a conflict over a bill that unilaterally redefines the regime on the border with Northern Ireland. Thus, no one knows how much more the UK economy may sink due to the confrontation with the European Union. This means that new stimulus tools may be needed in the future, and the Bank of England is unlikely to rush to apply them. Thus, the speech of the Bank of England Governor Andrew Bailey will be more important today.
General conclusions and recommendations:
The pound/dollar pair has supposedly completed building the upward wave Z and the entire upward trend. At the same time,it is very likely that a correctional wave 2 or B will be built, which could also have completed its construction near the 38.2% level. An unsuccessful attempt to break this level gives the markets an opportunity to start selling the pair with targets located around 1.2721 and 1.2539, which equates to 61.8% and 76.4% Fibonacci, counting on the formation of the third wave.
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