What to Expect from the BoE?

[Ben Graham]

Tuesday was incredibly interesting. Traders received a massive amount of important information that affects currency market movements. But not only that; it also impacts the long-term plans and prospects of the Bank of England (BoE) and the Federal Reserve (Fed). In this review, we will look at what has changed for the British central bank just two days before its final meeting of the year.

Among all the UK reports released on Tuesday morning, I can highlight two reports: the unemployment rate and the change in average hourly earnings. The unemployment situation is relatively straightforward. The rate rose to 5.1% year-on-year, but Andrew Bailey mentioned back in the summer that unemployment would continue to rise and reach a peak of around 5.4%. Therefore, everything is going according to the script "approved" by the BoE. It is also noteworthy that the market was not caught off guard by the rise in unemployment, as the 5.1% figure was precisely what was expected. Based on this report, I can draw the following conclusions: unemployment is rising in line with expectations; this is bad, but it was anticipated; the BoE still needs to consider easing monetary policy to stimulate the labor market. So, it seems that nothing has changed for the BoE on Tuesday? Not quite.

Average hourly earnings rose by 4.7% in October, which is much higher than market expectations (4.4%). Consequently, wage growth rates in the UK remain high, and the BoE (I remind you) has repeatedly linked a slowdown in inflation to a decline in wage growth. This suggests that wages could drive both overall and core inflation. If inflation starts to rise again, the BoE will find itself in the same position as the Fed: rising unemployment and rising inflation.

However, on Wednesday morning, the infamous UK inflation report was released, relieving tension among market participants. The Consumer Price Index dropped to 3.2% year-on-year, effectively giving the "green light" for a rate cut on Thursday. Yet, it is important to note that the wage report was published for October, while the inflation report is for November. If the consumer price index slows for two consecutive months, it doesn't mean it will keep declining.

Wave Analysis for EUR/USD:

Based on the analysis of EUR/USD, I conclude that the pair continues to build an upward trend segment. Donald Trump's policies and the Fed's monetary policy remain significant factors affecting the long-term decline of the U.S. dollar. The targets for the current trend segment may reach the 25-figure mark. The current upward wave structure is beginning to unfold, and I hope we are witnessing the construction of an impulsive wave set that is part of the global wave 5. In this case, we should expect growth up to the 25 figure, as I mentioned earlier.

Wave Analysis for GBP/USD:

The wave structure of the GBP/USD instrument has changed. We continue to deal with an upward, impulsive segment of the trend, but its internal wave structure has become more complex. The downward corrective structure a-b-c-d-e in C of 4 seems complete, just like the entire wave 4. If this is indeed the case, I expect the main trend segment to resume its formation with initial targets around the 38 and 40 figures.

In the short term, I anticipated the construction of wave 3 or c, with targets near 1.3280 and 1.3360, corresponding to 76.4% and 61.8% Fibonacci retracements. These targets have been reached. Wave 3 or c continues to develop, and the current wave set is beginning to take an impulsive form. Consequently, we can expect an ongoing increase in quotes with targets around 1.3580 and 1.3630.

Key Principles of My Analysis:

1. Wave structures should be simple and understandable. Complex structures are difficult to trade and often change.
2. If there is no confidence in what is happening in the market, it is better not to enter it.
3. There can never be 100% certainty about the direction of movement. Don't forget about protective Stop Loss orders.
4. Wave analysis can be combined with other types of analysis and trading strategies.

The material has been provided by InstaForex Company - www.instaforex.com