GBP/USD under the spell of big expectation divergence

GBP/USD pair has been hit by big expectation divergence on both side of the leg over the past two weeks.

• Last week, FED took on the doubters by suggesting that December meeting is still left and it's a live meeting with live possibilities of a rate hike of 25 basis points. Market was pricing at one points as little as 30% chance of a rate hike though Federal funds future but after FED communication that pricing went above 60%. Suddenly market, which has been pricing first hike, deep into 2016, got a sudden squeeze and pull back.

On the other hand,

• Bank of England (BOE) took an axe to the expectation and pulled back in their communications. According to latest report and communication yesterday, rate hike at turn of the year is not looking as very strong possibility. If fact, according to BOE, no hike till 2017 wouldn't put inflation target at risk of overshooting. Communication was more like dovish BOE chief economist Andy Haldane style.

No wonder Pound has drifted against Dollar more than 360 points, over the course of these two communication. Further downside seems likely.

We remain committed to our call for Pound towards 1.42 area against Dollar, since 1.58 resistance wasn't broken.