Following Thursday night’s ‘flash crash’ in sterling around 11pm, here is a rundown of what is next for sterling.
Context before the GBP crash
On October 2, UK PM Theresa May unexpectedly announced that Britain will be triggering Article 50 before March 2017. Her comments over several days after then suggested that Britain will cross the EU’s red line of the free movement of people. Ms May said immigration control (restricting free movement) will be top priority, over and above staying in the EU single market and protecting London City. Is Theresa May becoming a populist anti-big business leader or a Conservative Party leader? Another story for another day perhaps.
Point is even before Thursday night’s collapse, the GBP/USD rate was sliding deeper below $1.30 and had lost 3.15 per cent (four cents) over the week. GBP/EUR had declined by about 2.6 per cent (three cents) between October 1 and 11pm on Thursday night.
Around that time the pound then suddenly plunged by over 10 per cent from $1.26 to a reported (by some) rate of roughly $1.14, although the actual low now being referenced by Bloomberg ($1.1841) and Reuters ($1.1819) is much higher. So officially it was about a six per cent drop.
Why did this happen?
There is no concrete answer. The Financial Times had broadcast a report earlier with French President François Hollande warning “Britain must suffer the consequences of leaving the EU”. But the more talked about reason for the collapse was so-called algorithmic transactions in the FX market.
Essentially, the collapse was exacerbated by computer-driven traders.
The new trading range
The following are comments from Tobias Davis yesterday morning:
“This sterling move represents a sizeable shift in the trading range of both GBPUSD and GBPEUR currencies. As the market recovered from the low, it has failed to settle above $1.2500. So what does this mean? We have shifted into a new trading range of 1.2000/1.2200 to 1.2500. The GBPEUR range I see is 1.1000 – 1.1300.
“Thus far, the hourly low is $1.2320 which suggests this is a realistic next target level, as is GBPEUR at 1.1000 given this is a big figure.”