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Just two days back, we recommended going short in Euro against Pound as it has broken and closed below channel floor. However, that trade couldn't find much of a follow through due to heavy weakness in Pound. Euro is currewntly trading at 0.725 against Pound.
Now that break below channel floor is now turning out to be a false break which might lead the pair to test channel ceiling 0.733 area.
Pound is getting hammered by market in spite of Bank of England's (BOE) hawkish commentaries as many expect it would be difficult for BOE to hike rates at turn of the year due to upcoming EU referendum, low inflation, relative weakness in economy and headwinds from China.
Many investment banks like Citi, RBS has scaled back their rate hike expectations in recent weeks.
Despite so, we believe over time, Bank of England (BOE) will turn out to be more hawkish compared to European Central Bank (ECB), which is likely to expand its asset purchase program, which makes us more bearish on Euro compared to Pound.
Trade idea -
- In spite of Euro's recent jump back to the range, we remain fundamentally (based on monetary policy divergence, not on current account surplus or future growth dynamics) short Euro against Pound.
- However we do acknowledge that Pound has high potential to take beating in the short term over risk aversion.
