Where next for sterling after the flash crash?

Jake Cordell
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Mark Carney holds new £5 plastic banknote
How much will this note be worth by the end of the year? (Source: Getty)

The flash crash rocked currency markets overnight and has spooked investors this morning.

Despite some interesting theories as to its cause, the general consensus is it was a freak event triggered by some hasty algorithmic trading in a relatively dried-up markets. Nevertheless, that hasn't calmed nerves.

Before the crash sterling was hovering between $1.25 and $1.26 against the US dollar. As London traders sat down and desks and took over control, the pound is still two per cent down at just $1.2363, before a fresh round of selling took it even lower.

Investors are spooked. The Bank of England is investigating. The pound has shed six cents against the dollar this week and four against the euro.

So, where next for the beleaguered pound?

Just two days ago economists and analysts warned the pound was likely to remain under pressure until the end of the year. But talk of parity against the euro and a fall below $1.20 was consigned to the extremes. Most expected sterling would trundle along at around $1.28 until the end of the year.

Now, in the PFC (post-flash-crash) era that has all changed.

"'Flash crash’ as this most likely is, it will no doubt still add considerably to the current negative sentiment for the pound," said Derek Halpenny, head of global markets research at MUFG.

Trevor Charsley, markets adviser at Afex said: "The pound is ... still moving lower and there’s no sign that we’ve reached the bottom yet."

Record lows

Euro €1.0193 30 December 2008
Dollar $1.0420 26 February 1985

Naeem Aslam of Think Markets added: "The move of this magnitude really tells you how low the currency can really go."

The level to watch for the euro is €1.0193. That is the weakest the pound has ever been against the single currency, which it touched in intra-day trading on 30 December 2008. The pound only needs to fall another eight per cent to reach there.

Against the dollar, there is slightly further to go, with the 1985 low of $1.05 seemingly safe - for the moment.

We won't have to wait long for the first test of sterling's resilience. Later today crucial non-farm payroll figures for the US economy will be published. A strong reading there could push the dollar up and thus, sterling down, if traders believe it moves the prospect of a rate rise in the US closer, Ana Thaker, market analyst at PhillipCapital points out.

Shilen Shah, bond strategist at Investec, was particularly downbeat on the short-term outlook for the pound. He said sterling would continue to behave like an "emerging market" currency until the Brexit question was settled once and for all.

UBS and JP Morgan also came out this morning with fresh bearish tones on the currency, seeing further Brexit-related weakness in the months ahead. UBS thinks the pound could reach parity against the euro at some point next year.

Commerzbank said today: "The flash crash was ...more than a market anomaly. It was also a signal that a sudden stop is now more likely. The big risk now is that such fears can turn into self-fulfilling prophecies."

The German bank told clients: "We must be clear that the risk of another massive depreciation has increased significantly."

Some, ever the optimists, however, think the instability is artificially knocking the value of the sterling. "The move does not appear to be driven by anything fundamental, and this could present an interesting long opportunity given how far the currency has fallen," said BMI Research, part of the Fitch group.

However, not only are people worried about systemic problems afflicting the pound, there are also fears the flash crash might not be an isolated incident.

Joshua Mahoney, market analyst at IG said: "What is clear is that at times of relative illiquidity, the influence of trading robots will grow, raising the potential for these events to occur again."

He wasn't alone in his fear of the robots wreaking havoc.

What is going on with sterling?

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