Ever since it fell to as low as 1.2774 on August 24th, GBPUSD has been steadily rising. Today, the pair climbed as high as 1.3353 after it became clear that the Bank of England was getting ready for a rate hike later this year. The long-term economic logic behind the Pound’s jump is clear. Higher rates make credit, or money, more expensive, thus increasing the value of the currency. In the short-term, on the other hand, we believe traders might fall into a bull trap right now. The Elliott Wave analysis of GBPUSD below explains why.
The 3-hour price chart of the British Pound against the U.S. Dollar shows that the pair has drawn a complete five-wave impulse from the low at 1.2774. This pattern indicates an uptrend in progress. However, we should not expect more strength right away, because the theory states that a three-wave correction follows every impulse. If this count is correct, today’s rally should be short-lived. The upcoming decline is supposed to drag GBPUSD down to the support area of wave 4 of the impulse. In terms of price, this means a drop to at least 1.3150 from current levels. The negative scenario is further supported by the relative strength index, which reveals a bearish divergence between waves 5 and 3.
The news from the Bank of England might be good for the bulls in the long-term, but in the short-run the bears seem to have something else in mind. A decline of roughly 200 pips is likely.