Pound’s sudden slip baffles the markets

Source: Forex News

At the beginning of Friday’s Asian session the value of the pound unexpectedly nosedived both against the US dollar and the euro.

The British currency during the early parts of last week plunged to a three month low after Prime Minister Theresa May said during the Conservative Party conference that she would trigger Article 50 before the end of March 2017. Article 50 is a very basic plan which sets the procedure for any country to follow should they wish to leave the European Union.

But just before midnight GMT last Thursday, and at the very early stages of Asia’s Friday trading session, the GBP unpredictably plunged. It dropped by 5.7% from $1.26133 to $1.19065, which is considered as a dramatic fall given that the movement of even one cent is a big deal for traders. It is without doubt the largest daily fall of the pound after the 10% drop in result of the Brexit vote during late June.

Just a few minutes after the panic from the pound’s sharp fall, as expected, several buy orders followed returning the GBP/USD back to the 1.24 level. But investors were already searching to understand what had happened and what caused the sudden fall.

Several theories said that algorithmic systems (also known as algos), which are pre defined trading instructions based on some variables, caused the sell-off because they acted on negative Brexit headlines. In particular, a report in the Financial Times quoted the French President François Hollande requesting UK’s Brexit negotiations to be “tough” so that EU unity would be strengthened.

There was also speculation that the pound’s fall was a result of “fat finger” trading where the user entered a wrong digit into the platform which would subsequently trigger the selling off by algos. But brokers claim that erroneous trades would have been swiftly cancelled in this scenario. It could also be the case that the sudden drop was due to the expiry of forex positions on Friday and so financial institutions, banks, and funds moved to hedge their exposure to currency risk at the same time.

The Bank of England (BOE) was on alert following the sudden move and was looking into the possible scenario that computerised trading was the reason for the fall.

Although the GBP/USD regained a large part of its 5.7% fall, it never managed on Friday to reach back to the 1.26 level it was just before the sudden event. However, one of the reasons that the currency pair recovered much of its losses was the release of the Nonfarm Payrolls (NFP) data for September which revealed worse than expected results. US workforce on payroll during September increased by 156,000, and was worse than the previous month’s 167,000 result and also lower than analysts’ expectations for 175,000.

There is increased uncertainty about the pound’s upcoming performance against major peers. There is a number of recent economic data which suggest that the British economy has not been significantly affected by Brexit, however there are hints that the pound sterling might be under pressure as Brexit moves closer to becoming a reality.

http://www.bbc.com/news/business-37582150
https://www.theguardian.com/business/2016/oct/07/theories-emerge-for-pounds-flash-crash-against-dollar

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