Sterling Decline is Still in Progress

The new UK government gave a boost to sterling, GBP/USD rallied to the main resistance line on the chart below.  This followed a steep decline when the budget was announced in September.  Markets don’t move in a straight line but they tend to folow the same path.  The path for GBP/USD is down, I believe this rally will be followed by more weakness.  The main drag on GBP/USD is the strength of US interest rates, they are rising faster than UK interest rates.  At the same time UK consumer confidence is at record low, UK consumers are weak and inflation in the UK is higher than in the US, this means real rates are deeply oversold. While this situation remains GBP/USD will be weak.  The rebound is a relief rally, the challenges ahead will remain.

 

The decline has been relentless and there are many subdivisions which makes the pattern difficult to interpret. The sharp drop on 26 September could mark the end of wave 3. Wave 4 is taking the shape of a zigzag [a,b,c (circle)]. The question is, will the rally end with another push above the resistance line?  Unlikely, the next move is wave 5 down, an initial target is 1.0600.

Thierry Laduguie is market analyst at www.e-yield.com

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