(qlmbusinessnews.com via news.sky.com via uk.reuters.com – – Fri, 7 Oct, 2016) London, UK – –
The pound has endured a temporary collapse in value to new 31-year lows, sparking market chaos and a Bank of England probe.
Having traded as low as $1.26 to the dollar on Thursday it slumped to $1.18 within minutes during Asian trading – hitting $1.14 briefly at one stage according to Thomson Reuters – a fall of up to 9%.
But official market charts did not measure the lowest figure because trades were later cancelled, the data provider said.
It settled at $1.24 before slipping to $1.22 when US traders returned to the market in late-morning European trading.
The volatility also saw sterling slip to €1.11.
There were several initial theories on what caused the pound panic in Asia – including a ‘fat finger' mistake in inputting data – but the most likely explanation was a rogue algorithm in an automated trading system triggering a wider sell-off.
It happened shortly after the publication of a report by the Financial Times that French president Francois Hollande had demanded a tough stance on Brexit negotiations.
IG Markets' analyst Angus Nicholson said it “looks like it was an algorithm-driven flash crash”, adding that “given low volumes in the Asian session, it would have forced other algorithms to join in and magnify the fall”.
The Bank of England said that while it has no powers of regulation over the market, Governor Mark Carney has asked the Bank for International Settlements to look into the events in order to discover whether any lessons can be learned.
It has been a rollercoaster week for sterling in the wake of the EU referendum fallout.
Investors were spooked by confirmation that the Prime Minister would trigger Article 50, the official Brexit process, by March next year and comments the market saw as Britain keen to leave the European single market so the Government could tighten its grip on immigration.
The pound had been trading near $1.30 on Monday before starting its latest decline.
Its erosion in value helped lift the FTSE 100 to near its record high as the week progressed, and it finished 150 points up from its start on Monday morning.
The mid-cap FTSE 250 did strike a new top level – with export-facing firms and those making dollar sales seeing the biggest individual gains on both indices.
Meanwhile, Asian and European markets were either in negative territory or flat.
Naeem Aslam, chief market analyst of Think Markets, warned it was likely to be a “heavy day” for trading on Friday on world currency and stock markets.
He said of the pound's dramatic decline: “What we had was insane – call it a flash crash – but the move of this magnitude really tells you how low the currency can really go.
“Hard Brexit has haunted sterling,” he warned.
Yosuke Hosokawa, head of the currency sales team at Sumitomo Mitsui Trust Bank, said there could be more bloodshed to come.
“We thought today's plunge was a matter of time. Negative factors were mounting against the pound, and eventually the dam broke.”
He added: “We have not seen the bottom yet. Breaking the 31-year low is now in sight.”