Pound drops out of favor as rate hike bets slashed – calls updated

Pound is the worst performing major since yesterday after touching highest level since June. Pound traded as high as 1.581 against Dollar, before falling sharply as S&P 500 wiped out 3% initial gains to close red for the day, suggesting current market turmoil is clearly not done with.

• Rate hike expectations from FED suffered serious pullback due to current market turmoil. According to overnight index swap, now 58% are expecting rate hike in December compared to 22% in September.

Naturally the question comes, if FED finds it difficult to kike rates, how hawkish can the Bank of England (BOE) be, which is clearly behind the curve for first rate hike.

Current sharp pullback puts two of our calls at risk.

• We recommended reentering our longer term buy call on Pound at 1.56 area after reaping short term profit playing short. Though stop loss is still quite far away at 1.53, the trade is at risk since expectation was a rate hike from FED in September, which would have brought Pound and BOE in the limelight. We are still not recommending exit on the trade but keeping a close watch. Pound is currently trading at 1.558 against Dollar.

• Yesterday, we suggested buying Pound against Yen at 189 with target around 196 with view that current market turmoil to subside. However against our expectations both Yen and S&P 500 is pointing to some further continuation of the current turmoil. After showing initial promise and more than 100 pips profit the trade has moved in red (-270 points). Though our stop loss remains still 300 pips away, Pound risks falling below 180 mark against yen if risk aversion continues. We are preferring to slowly close out position to minimize loss at bounce back. We are holding back this trade unless turmoil settles.