THE FLOWS - UK GDP came in above forecast on Wednesday and the Pound was doing its best to put in a big rally. Ultimately however, while I love the prospects for the UK currency on a medium and longer term basis, I still believe there's more downside ahead. We need to be mindful of the fact that growth in the UK is still sitting around half its long run average, Brexit uncertainty is capable of putting a serious dent in the growth outlook at any moment, and the Bank of England rate hike has been nearly fully priced in next week. This leaves little room to price more upside and a whole lot more downside risk over the short term.
OVERREACTION - I had been looking to pick up some GBPUSD on a dip below 1.3000, but this latest bounce also has me looking at the shorter term downside potential. If there's no more Brexit turmoil and if the economic data impresses over the coming days, perhaps it will negate the downside. But again, I always like to look at what's priced and then once I know what's priced, I consider the alternative. Why? Because when you trade markets you come face to face with that life lesson of something never being a certainty until it happens. I actually jumped in for a short term play via GBPAUD, where I sold some with the market exploding higher on the back of the UK GDP and early Wednesday Aussie CPI softness. Interestingly, just as with the UK GDP data, I thought the market overreacted to Aussie CPI. Most of the CPI drop came from one component in the data (fruits and veggies), with the others actually holding up alright. As far as Cable goes, while it holds below 1.3350 on a close basis, that short-term bearish outlook remains.
TODAY'S RISK - Moving on, we have the ECB decision today of course and that will be one to watch. We've been waiting to see if the Euro is going to break and which way. Today's risk could very well do the trick. As I've been saying, that next break could be a big one as it could mean the difference between 1.2500 and 1.1200. Keep an eye on 1.1910 and 1.1660. A close above 1.1910 will seriously the H&S possibility and leave the door open for a bullish continuation in the Euro. A close back below 1.1660 will leave us with a confirmed H&S top and the possibility for that measured move pattern objective at 1.1230. There are times when things feel like they could get super volatile, super fast and right now definitely feels like one of those times. I will continue to keep an eye out and as always, will let you know if anything interesting sets up.