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Ignore 'Trump Bump', Pound-to-Dollar Rate Still Likely to Go Lower says Elliot Wave Expert

Trump and Powell

Above: Donald Trump and Federal Reserve Chairman Jerome Powell. Trump is not happy with the direction of travel of Fed rates and the rise of the Dollar. Image © The White House

- GBP/USD in sharp jump on Trump comments, but this is not yet a reversal

- Many analysts see this as a potential bottom for the pair

- But Elliot wave studies suggests bottom could be lower towards mid 1.20s

GBP/USD has dropped to 1.3000 and stalled and reversed with a sharp move higher coming in the wake of a tirade against the Dollar's strength from US President Donald Trump.

Trump has put a near-term top on the Dollar following a two-pronged attack on the currency via accusations against the Federal Reserve of unwarranted interest rate rises and currency manipulation by China, the European Union and other countries.

Even before Trump fired up his Twitter account, 1.30 showed its mettle as a key technical support zone and many analysts think it could be a likely candidate for a bottom, whether temporary or otherwise.

Traders often chose major round-numbers as handy places to take profit or close out positions which often leads to pull-backs and consolidations.

David Bloom, chief currency strategist at HSBC, recently said the level represented "cheap to fair value", for the Pound; Bloom forecast a fall to 1.30 quite some time ago, before the 1.43 top in April and the inference is the pair may not go much lower.

But, if you were to put your technical hat on, you would note that this is by no means a reversal in the Dollar's trend.

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A Relief Bounce Before the Next Leg Lower

James Stanley, a currency strategist at Dailyfx.com, sees the GBP/USD pair as "oversold" but due to a "confluence of bearish factors" still vulnerable to further downside.

On Thursday, after the inital test of 1.30 and penetration to 1.2957, he saw the pair pulling back up to 1.3050, at the very least, if not higher, in a correction before bears renewed their push lower.

"We’d looked at the prospect of a pullback to the 1.3050 level earlier this morning, and that theme is playing out," says Stanley, adding, "a bit higher on the chart another area exists that could remain as interesting for bearish continuation, and this spans from 1.3083-1.3101. Resistance showing here could open the door for stops above the 1.3117 Fibonacci level."

For one analyst the move to 1.30 represents the opposite -  a break below a key pivot which suggests more downside to come, a bearish breakthrough; not the location of a probable recovery rally.

That analyst is Alex Geuta, an Elliot wave expert, at broker Liteforex, who was forced to revise his bullish analysis after the pair broke below a key line in the sand at 1.3049.

He now sees GBP/USD as likely to continue on a path lower to a probable bottom at about 1.25, as an Elliot wave (2) continues to unfold.

GBP to USD

His previous bullish forecast saw the pair as at the start of a new bullish wave 3 (wave 3's are usually the steepest), tipped to reach as high as 1.35 initially, but to the mid- 1.50s eventually.

Yet this was conditional on the pair remaining above the 1.3049 level. As it was, it failed to hold above that level, which means we are probably still in a corrective wave (2).

Elliot waves are cycles of buying and selling, of rising and falling prices, which are composed of 5 waves numbered 1-5, or labeled using Roman numerals, as in I, II, III, IV, and V.  

Waves 1,3 and 5 move in the direction of the dominant trend whilst 2 and 4 represent corrections. Wave 3 is almost always the longest and the strongest wave.

Elliot waves

After a 5-wave pattern has finished the market corrects back in a shallower counter-trend move labeled A,B, and C.

Elliot waves are each composed of smaller 5-Elliot waves and are themselves components of larger 5-wave patterns, with waves within waves, ad infinitum.

Elliot wave analysts try to establish the point at which the current market is in the greater wave pattern, which enables them to predict what will happen next.

In the case of GBP/USD, Alex Geuta has changed his view that the pair is at the start of a large Wave (3) higher. He now thinks it is now still in a wave (2) lower, in the final C-wave of that wave (2) to be precise.

If the pair remains below 1.3292 it will now probably go lower, to a target between 1.2800 and 1.2520.

However, after that there is a chance once again that it will start to rise in a wave (3) higher.

Elliot waves are considered by many to be a reliable method for forecasting price moves when employed by competent analysts and traders.

In 1984 the Elliot wave expert and author of "The Wave Principle", one of the leading texts on Elliot Wave analysis, Robert Prechter won the US trading championship in options with a stunning 444% gain. The next closest competitor showed an 84% gain.

Nevertheless, Prechter hasn't always been right: he famously called for a continuation of the great bear market after stocks bottomed in 2009, when instead stocks rallied to new highs.

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