Pound crash: Mystery 6% plunge to be investigated by Bank of England

Sterling fell as much as 6 per cent to $1.1841 – the biggest plunge since the Brexit vote

Zlata Rodionova
Friday 07 October 2016 10:24 BST
How the pound has struggled since Brexit

The Bank of England has confirmed that it will investigate the cause of a sharp fall in the value of the pound, which plunged in mysterious circumstances in overnight trading in Asia.

The news of the investigation came after the pound suffered a jarring flash crash on Friday morning, nosediving more than 6 per cent against the dollar in a matter of minutes.

“We are looking at the causes of the sharp falls over night,” the Bank of England said in a statement.

The pound fell as much as 6 per cent to $1.1841 – the most aggressive move since the results of the Brexit vote emerged in June – before recovering to $1.24 against the dollar.

The flash crash aftershocks also briefly pushed sterling below €1.10, for the first time since early 2010.

Sterling's volatility also overshadowed the latest data on the US labour market, which usually grabs the attention of the currency market.

The pound regained some of its lossess but was still down 2 per cent at $1.2363 ahead of the US markets opening on Friday.

Putting Friday's morning's “flash crash” aside, the pound has still fallen about 18 per cent against the dollar to below $1.24 since Britain voted to leave the European Union on 23 June.

The sudden plunge left investors wondering what drove the flash crash.

“It was just another quiet day in Asia, and then, Bang! All the lights went red,” Matt Simpson, senior market analyst at ThinkMarkets, told CNN.

There was speculation a technical glitch or human error had sparked a rash of computer-driven orders.

Naeem Aslam, chief market analyst of Think Markets, said the fall was an indicator of how low the currency could still go.

“What we had was insane – call it flash crash but the move of this magnitude really tells you how low the currency can really go,” said Naeem Aslam, chief market analyst of Think Markets, in a note, according to Bloomberg.

Hard Brexit has haunted the sterling,” he added.

One of the theories surrounding the mysterious flash crash include the publication of a report by The Financial Times.

UK: Pound drops to 31-year low against Dollar on Brexit fears

In the report, French President François Hollande said Britain must suffer the consequences of leaving the EU and the EU must demand a tough stance when it negotiates an exit.

Su-Lin Ong, a senior economist at RBC Capital Markets, said: “The move coincided with an FT story about French president Hollande demanding tough Brexit negotiations. The move was exacerbated once stops were tripped below a key level of $1.2600 in very thin trading before the US payrolls.”

The pound has been very sensitive to politics lately as fears over the consequences of a hard Brexit haunt investor attraction towards the currency.

Theresa May, at the Conservative party conference on Sunday, hinted that the UK was moving towards a Brexit deal that could restrict its access to the European single market, but provide greater control over immigration levels.

Sean Callow, a senior currency strategist at Westpac, said sterling had been “on a precipice” since her speech.

In a gloomy note HSBC predicted the pound will fall to $1.10 against the dollar and hit parity against the euro by the end of 2017.

David Bloom, HSBC’s global head of FX, said the currency is now “de facto official opposition to the Government’s policies”.

“The argument which is still presented to us, that the UK and EU will resolve their difference and come to an amicable deal, appears a little surreal. It is becoming clear that many European countries will come to the negotiation table looking for political damage limitation rather than economic damage limitation. A lose-lose situation is the inevitable outcome,” Mr Bloom said.

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