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The Bank of England is investigating the overnight drop in sterling

General Election - Economy
The Bank of England is looking into the sharp drop in sterling overnight (Source: Getty)

Mark Carney has asked the Bank for International Settlements (BIS) to investigate the cause of a sharp fall in the value of the pound in overnight trading in Asia.

BIS, often dubbed the central banks for central banks, has global control for the currency markets, though with no hint of wrongdoing, it is unclear exactly how far an investigation will go.

In shock overnight trading, the pound fell from $1.26 to $1.18 almost instantly, before recovering slightly to stand at $1.24 against the dollar. It was the same story against the euro, where the pound sank to €1.1031 at around 12.30am this morning.

There are a number of potential causes for the sharp drop in the pound being touted this morning. Some believe it could merely be due to a fat finger trade, others are blaming comments made by French President Francois Hollande, which were then accentuated by algorithmic trading at an exceptionally quiet period of the morning Asian session.

On Friday afternon the Bank said:

"The governor of the Bank of England asked the BIS markets committee this morning to look into the events surrounding the flash crash in sterling during Asian trade. With input from the Bank, the committee will review the lessons from this, and other recent episodes of flash events in FX markets at its next meeting."

Threadneedle Street has previously cited concerns about excessive volatility in the currency markets. In December 2015, it said: "[The] broad trend towards fast, electronic trading and the impact of necessary regulatory reforms on the provision of market liquidity" had led to markets becoming "more fragile" since the financial crisis.

The so-called 'flash crash' comes at the end of week that saw the pound plummet to new lows. On Tuesday, sterling hit a 31-year low, prompted by Theresa May's announcement that Article 50 will be triggered by the end of March next year, although this gave a boost to the FTSE 100 which subsequently smashed past the psychologically important 7,000 mark.

What is going on with sterling?

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