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Last night’s Sterling slump was the second most extreme on record versus the Dollar and the worst since the panic of June 24 when markets reacted to the UK’s referendum result on EU membership. Investigations are underway but a single reason may never be identified for last night’s flash crash on the pound. It is thought that tough Brexit negotiation rhetoric from French President Hollande may have triggered algorithms (computer trading programs), increasingly popular and emotionless tools capable of cross referencing price activity and media sentiment in order to make profitable trading decisions.
A rise in negative sentiment related to Brexit and the UK currency around midnight may have led to selling pressure that saw the yesterday’s 1.26 lows in GBP/USD and 2-day lows of 1.13 in GBP/EUR breached. This likely resulted in automatic orders being executed to close positions and limit losses. Additional selling pressure may have come from FX providers closing out clients who had insufficient margin to support losing GBP positions. Algos likely noted the negative momentum and jumped on the bandwagon, hoping to profit from the down move to make matters worse.
With new lows (which vary between providers to complicate matters) psychologically imprinted on traders’ minds and their stop-losses levels revised accordingly, could we be in-line for another perfect sterling storm the next time an EU leader talks tough or Theresa says “Brexit is Brexit”? There’s plenty of potential as we head towards the triggering of Article 50 in Q1 next year. A US rate hike could also be a culprit before year end should the Fed decide to go for it, fresh USD strength pushing Sterling back south. Beware.
Mike van Dulken, Head of Research, 7 Oct
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