On December 2nd, we wrote that GBPUSD was set for a sustained rally in 2026. And while the pair gained more than 660 pips and is still up since then, we’re no longer that bullish. The reason for this change of heart is not the escalating military conflict in the Middle East, although it certainly plays a role. Instead, the pair’s drop in February simply inspires a better idea. The Elliott Wave chart below explains.
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Three months ago, we thought that the recovery from Liz Truss’ disastrous mini-budget was a sequence of first and second waves within a bigger impulse pattern. Hence our expectation for a sustained rally in wave three. But the bulls’ failure to break the resistance line drawn through the 2018 and 2021 highs strongly suggests that it was actually a leading diagonal.
It carries the same meaning as the regular five-wave impulse and is labeled the same way. The biggest differences are the overlapping of waves 1 and 4 and the pattern’s contracting shape. But just like a normal impulse, the leading diagonal is followed by a three-wave correction before the trend can continue.
If this count is correct, the recovery from 1.0360 to 1.3870 was a leading diagonal, marked 1-2-3-4-5 in wave (1). February’s bearish reversal stands for the beginning of wave (2), which can potentially drag GBPUSD down to the support area between 1.2400 and 1.2100, before the bulls can return in wave (3). Their next attempt to break that resistance line is likely to be successful, but they might have to wait for it until 2027.
Similar Elliott Wave setups occur in the crypto, commodity and stock markets, as well. Our Elliott Wave Video Course can teach you how to uncover them yourself!
