Potential Rally in GBP/USD Will Be a Drag on FTSE 100

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As I write GBP/USD is pushing back to 1.2500, we could be at the start of a larger move to 1.2700. The pound has been trading sideways for a while, this kind of move is generally a pause in the main trend. If we assume that the trend is up (the rally from the low in January), the uptrend is still in place and the rally is about to resume.

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The reason I question the next move is because there are two ways to look at the triangle. In terms of Elliott wave analysis, sometimes the pattern is not clear, for example where did the previous rally ends? This rally is in five waves, however, did it end at 1.2673 [top of wave v (circle)] or at 1.2700 [top of wave b (circle)]? The end of a five-wave rally is followed by a decline in three waves so if rally ended at 1.2700, the decline to new lows in February is the first leg of a larger correction and the triangle is the second leg. This imply a decline for the third leg.

The problem with this scenario is that while the rally to 1.2700 can be counted in five waves, on my charting application the previous decline which is the fourth wave touched to top of the first wave. This is called “overlap” which is not possible under Elliott wave rules. In an impulse wave the fourth wave cannot overlap the first. Therefore the rally ended at 1.2673, that level is the top of wave v (circle).

The corrective wave is in three wave [a,b,c (circle)] as you would expect in a counter trend. Based on the Elliott wave pattern the rally from the low in February is the start of the next five-wave rally, this move is wave i (circle) and the triangle [(a),(b),(c),(d),(e)] is wave ii (circle). This suggests we are now in wave (iii) up to 1.2700. Such a move would be a drag on the FTSE 100 and if the S&P 500 pulls back as well, the FTSE 100 could decline back to 7200 or lower in the short term.

Thierry Laduguie is Trading Strategist at www.e-yield.com

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