The wave structure for GBP/USD remains somewhat ambiguous yet generally clear. At present, there is a high probability that a long-term downward trend is forming. Wave 5 has taken on a convincing shape, leading me to consider that the larger Wave 1 is complete. If this assumption is correct, then Wave 2 is currently developing, with target levels near 1.26 and 1.28. The first two sub-waves within Wave 2 appear to be complete, while the third wave may conclude at any moment.

Demand for the British pound has been rising recently solely due to the 'Trump factor,' which remains the pound's primary ally. However, in a longer-term perspective, beyond just a few days, the pound still lacks a solid fundamental basis for sustained growth.

An essential factor to consider is that the Bank of England is preparing for four rounds of policy easing in 2025, while the Federal Reserve does not plan to cut rates by more than 50 basis points. These plans could change due to Donald Trump's policies, but for now, the Fed maintains its existing stance. Evaluating Trump's impact on the U.S. economy remains premature.

The current wave structure remains intact, but another increase in GBP/USD could raise serious concerns regarding its validity.

The GBP/USD exchange rate dropped by 20 basis points by the start of the U.S. session on Tuesday.

A 20-point gain for the U.S. dollar might seem like a victory, given that the currency has struggled even to achieve such small advances recently. However, 20 points is clearly insufficient to indicate even the formation of a corrective wave.

Today's positive reports on U.S. building permits and new housing starts provided some support for the dollar. However, was that support meaningful? A mere 20 points?

Tomorrow, the Federal Reserve will announce its policy decision, and the market may resume selling the dollar. Many analysts and economists expect a U.S. recession, so what should we anticipate from Jerome Powell and the FOMC? The answer: a more dovish shift in monetary policy rhetoric.

The Fed is unlikely to change interest rates in March, but it may signal the possibility of more accommodative measures in the future. Given that demand for the U.S. dollar is already weak, even a subtle dovish shift could accelerate the dollar's decline.

The wave structure is on the verge of breaking down. Despite the corrective nature of the pound's rally over the past two months, a downward Wave 3 has yet to begin. At this stage, Trump's influence is stronger than wave analysis itself, and nothing seems capable of boosting demand for the dollar.

The situation is highly uncertain, and it is difficult to predict how it will unfold.

Key Takeaways

The wave pattern for GBP/USD suggests that the downward trend is still in progress, with Wave 2 continuing to form.

At this stage, I would recommend seeking new short positions, as the current wave structure still supports the continuation of the long-term bearish trend that began in fall 2024. However, how Trump's policies will further influence market sentiment remains a major question mark.

The pound's recent surge appears excessive in the context of the wave structure, raising concerns that the pattern may be breaking down.

On a higher wave scale, the wave pattern has shifted. We can now assume that a new downward wave sequence is forming, as the previous three-wave bullish pattern is likely complete. If this assumption is correct, we should expect a corrective Wave 2 or b, followed by an impulse Wave 3 or c.

Core Principles of My Analysis

1. Wave structures should be simple and clear. Complex formations are difficult to trade and prone to frequent changes.
2. If market conditions are uncertain, it is better to stay out of the market.
3. There is never 100% certainty in market direction. Always use Stop-Loss orders for risk management.
4. Wave analysis can be combined with other technical methods and trading strategies.