GBPUSD climbed to 1.3267 at the start of August, but the bulls’ dreams of reaching even higher levels were destroyed, when the pair reversed to the south for what turned out to be a selloff of over 430 pips – the pair fell to 1.2831 on Friday. Today is Monday and the Pound is in recovery mode, approaching the 1.2900 mark. Should we expect more upside or join the bears? To answer this question, we have to take a look at the wave structure of the recent decline on the hourly chart of GBPUSD below.
The Elliott Wave Principle postulates that every impulse pattern is followed by a correction of three waves in the other direction. Here, the pound’s drop against the dollar has a textbook impulsive structure, labeled 1-2-3-4-5. It is also worth noticing that the sub-waves of wave 1, which is the extended wave, are clearly visible, as well.
Judging from this chart, GBPUSD has completed a five-wave decline, which means a three-wave rally could be anticipated. In addition, the relative strength index is flashing a bullish divergence between the lows of wave 3 and 5. This is a sign that the bears are running out of power, at least in the short-term, and another reason not to sell the pair right away. In our opinion, the sterling’s next target is likely going to be the resistance of wave 2 near 1.3020.
If this is the correct count, this is not an appropriate time to start selling GBP to USD. On the other hand, once the rate climbs to the target area, the risk/reward ratio of the short trade would be much improved. We’d rather wait for it.