NOT SO SIMPLE - So today we get the Bank of England decision. The Pound has enjoyed a nice rally in the lead up, initially inspired by last week's above forecast UK GDP. Everything is looking awesome right now and nothing can go wrong right? Well of course not! I have been looking to play into this bias that everything isn't in fact great in the short term, though clearly, it has been a tough go. Nevertheless, the fundamentals are the same and to me, suggest we could see some more chop before the Pound truly considers that next big upside extension. Yes. We could make that move right now...but let me review why I wouldn't be getting too aggressive just yet.
WHAT'S PRICED - Everything in markets is about how much something is priced. The degree to which something is priced, determines how close it is to moving to the level it is destined to be at based on whatever risk it is that the market is considering. Most of the time, it is a collective risk that includes many variables. Sometimes, it's about one specific risk. In the case of the Bank of England decision, I would argue that with the rate hike now all but priced in later today, the greater risk for let down (with respect to the BOE decision), is unquestionably on the bullish side of the Pound. While it's true, a rate hike and upbeat outlook could fuel additional gains, it's also true that this is what the market is expecting and why the market has rallied into the decision. Clearly, this opens the door for a sell the fact reaction, once the hike is confirmed.
NO CHOICE - Another very important point to highlight here the Bank of England's motivation for a rate hike. In an ideal world, the Bank of England would be best holding off for now, with the economic outlook still in question and Brexit uncertainty not yet out of the way. But because we've seen this rise in inflation, the central bank has been forced into a situation where it needs to be thinking about rate hikes, irrespective of any looming risks to the recovery outlook. And for this reason alone, it would be dangerous to be feeling too good about the path forward right now. I do believe the Pound is a great buy, but I have a hard time making the case just yet. Ideally, we get another drop below 1.3000 at which point it will make sense. Why? Well - because any Brexit uncertainty will be more removed and the US Dollar may have then finally put in that rally it has been warning about.