Bank of England investigating dramatic overnight fall in pound

Potential causes of sterling flash crash that compounded earlier losses include ‘fat finger’ error and computer-generated trade.

The dramatic collapse in the pound overnight is being scrutinised by the Bank of England amid suggestions that a “fat finger” error or computer-generated trade was behind the slide in sterling to a new 31-year low.

The trading incident appears to have lasted for about four minutes in early Asian trading on Friday, compounding the losses that sterling had already suffered following speculation that Britain is heading for a “hard Brexit”.

The Bank, which had been on alert for the impact of computer trading on markets, said: “We are looking at the causes of the sharp falls overnight.”

The pound dropped by 6% to $1.1841 on Friday morning, with traders left puzzled as to the cause.

While traders continued their postmortems, the HSBC strategist David Bloom said: “The currency is now the de facto official opposition to the government’s policies.

“To us, the foreign exchange market is exhibiting an uncanny resemblance to the five stages of grief. First, following the Brexit vote came the denial – theories circulated whether a second referendum would have to take place. Second was anger – claims the vote was unfair. Third was the bargaining – arguments maybe it wouldn’t be that bad, what if the UK followed the Norwegian or Switzerland model. Now, the fourth – a gloom is prevailing over the pound.

It’s become an uncomfortable reality to the market, post the conservative conference, that the UK will embark on a ‘hard Brexit’.”

Bloom said he expects the pound to be at $1.10 by the end of 2017.

The fall in sterling helped propel the FTSE 100 higher by 75 points by 10am in London, a rise of 1%, taking it to 7,075. The blue-chip index tends to rise when sterling falls, because most of the constituent companies earn the majority of their money in dollars, rather than pounds.

At one stage in overnight trading, the pound was down by as much as 10% to $1.1378, until a rogue outlying trade was cancelled, leading to a recovery. When the London markets opened, sterling was trading at $1.2430, although it later came back to $1.2350. Trading in Asia had been thin, with markets awaiting key employment data from the US later on Friday.

As the currency rallied, there was speculation that a technical glitch or human error had caused a flurry of computer-driven orders.

Naeem Aslam, the chief market analyst at Think Markets, said: “What we had was insane – call it flash crash, but the move of this magnitude really tells you how low the currency can really go. Hard Brexit has haunted sterling.”

The Bank has previously highlighted the impact of trading algorithms. “Some markets appear to have become more fragile, as evidenced by episodes of short-term volatility and illiquidity over the past couple of years,” Threadneedle Street said last December.

“Potential drivers of such episodes include a broad trend towards fast, electronic trading and the impact of necessary regulatory reforms on the provision of market liquidity. Overall, there is evidence that the level of liquidity in ‘normal’ times has declined in markets that remain reliant on dealers to intermediate between clients.”

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