Posted October 07, 2016 Ashley Chadwick
In the early hours of Friday morning, Sterling fell over 6% against the dollar in just two minutes. Sources differ, but Cable traded at $1.20 forming massive new 31 year lows. It retraced a majority of the move and by 9am London time it was looking to test $1.25 again, but it lost a point in the next hour and is back below $1.24.
At this stage no one is sure what the main cause behind it was. Sources have been citing either a fat finger or an algorithm gone wrong. The low volumes in the Asian session could mean that a large sell order got executed and triggered a few stops and caused such a large move. However, the path of the retracement and the current trading level indicate it may not have been as simple as a mistake. It took an hour for Sterling to recover about 70% of what it lost, but has since given some of that back and is 300 pips down on the day still.
The weakness this week has originated from concerns over Brexit. What is becoming clear is that, Brexiting up is hard to do. There is a lot of speculation that Britain and the EU are set for a hard Brexit. The desire for greater control of Britain’s borders could well lead to being blocked out of the single market. This is seen as a major negative for the British economy and could result in the Monetary Policy Committee further easing policy. There may be greater need for QE, or low rates will be maintained for even longer if Britain can’t get a deal upon leaving the EU. This in turn has been driving the Pound lower.
The weakness is played out against all currencies as the crosses show. The Euro is now worth over £0.90 for the first time in 5 years and went as high as 0.9264, a 7 year high. It will be difficult for technical analysts to find levels in this area, given how rarely the Pound has traded around these levels. Yesterday a Pound would have bought you 132 Yen, it will now get you a little over 127, making 4 year lows.
There seems to be little to stop the slide in the value of the Pound at the moment. Although, this could well have positive impacts for the economy. Exporters will receive a boost as they become more competitive. Domestic consumers will surely not be looking so far for their goods and the tourism industry is set for a big boost. The FTSE is over 7000 again and within 1% of all time highs and could well make new highs very soon, but this is more a result of FTSE listed companies having a lot of revenue in foreign currencies, rather than due to the underlying strength of the companies.