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Outlook on the British Pound:

As our readers know, we watch the charts of the U.S. Dollar carefully from week to week, because opportunities in other currencies are often reflected in an inverse way by the Dollar. Currently, we see the Dollar as being at a crossroads, where there is the possibility that it can bounce from support that's just slightly below the Dollar lows of early September. We will revisit some of the scenarios that could transpire with the Dollar in an upcoming article.

Meanwhile, keeping in mind the possibility of a Dollar bounce, a corresponding opportunity might be developing with the British Pound. The GBP/USD price has inhabited a converging range since 2009, setting up what may be a large "b-wave" triangle. If so, then a strong downward "c wave" should be expected after the final wave of the triangle is complete. The downward move would be expected to be similar in magnitude to the price decline of 2008.

British Pound monthly candles, 2008-2012

As Elliott Wave rules would have it, the final 'e' wave of a well-behaved triangle stays within the boundary shown by the trendline drawn from the end of wave 'a' to the end of wave 'c'. Sometimes an 'e' wave can extend slightly beyond that boundary in a rush of exuberance (upward) or pessimism (downward), but in no case should price go beyond the extreme represented by the end of wave 'c'. If price goes beyond 'c', then the pattern is not a triangle. In this case at hand, price should not go above 1.6666, which is the value at the end of the wave labeled '(c)'. (Price is based on continuous contract futures data.)

The chart shows monthly candles. However, on a smaller timeframe, wave "(e)" looks as though it might need one more high to complete the pattern. Signs to watch for, as an indication that the Pound may have turned downward, would include the way price behaves at areas of prior resistance. The Pound overcame resistance at 1.6065 and later at 1.6090. If price goes below those levels, and they once again act as resistance, then a continued slide downward would become more likely.

Based on standard Fibonacci relationships, a possible target area for wave '(c)' would be about 0.618 times the length of wave '(a)', or approximately 1.1910. (Keep in mind it's not yet possible to know exactly where to start measuring from, since the triangle has not been confirmed as completed.)

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