Flash crash rocks pound as Hollande warns on Brexit

Sterling suffered a dizzying “flash crash” against the euro and dollar in a computer-generated sell-off, sending Brexit shockwaves across markets after France warned of perils ahead for Britain.
The pound plunged more than six percent against the dollar in under ten minutes in Asian trading hours — at the end of a tumultuous week of heavy losses after Prime Minister Theresa May signalled she would trigger Britain’s departure from the European Union by the end of March.
A spokesman for the Bank of England said that it was “looking into” the cause of the flash crash — a vertiginous drop in an asset’s value that can be triggered and exacerbated by automated trading systems.
Speaking Thursday, French President Francois Hollande said the EU should take a tough line with London during exit talks to prevent the break-up of the bloc.
“The value of sterling plummeted overnight as algorithmic trading programs apparently triggered a crash,” said XTB analyst David Cheetham.
“Comments from French President Hollande (surfaced) a minute before the selling began, so it seems far more plausible that news-scanning algorithmic trading systems began a move which gathered momentum.”
Cheetham added that a combination of trades placed by algorithms and stop-loss orders can “exacerbate the move, which is commonly seen to retrace by a significant proportion of the decline within a matter of minutes.”
Stop-loss orders are automatic orders to buy or sell an asset once it reaches a certain price level.
The pound fell off a cliff at about 2310 GMT on Thursday to strike a 31-year low at $1.1841, before rebounding back above $1.24.
The euro also hit a 6.5-year-high at 94.15 pence.
“A lot of investors are still scratching their heads as to how and why it happened, whether it was a fat fingered trader in Tokyo, an algorithm scanning for any negative Brexit news, or just a big seller of the pound,” said analyst Alex Edwards at trading firm UKForex.
“Whatever it was, it shows us that the pound is looking very vulnerable right now.”
Approaching midday in London, the pound rowed back to $1.2368, while the euro stood at 89.99 pence.
The crash was the second-largest intra-day decline in the pound, bettered only by its precipitous 11-percent slump on June 24, when the shock Brexit result emerged.
After rebounding, the pound again fell sharply this week on fears of a so-called “hard Brexit” that would see Britain depart the single market, or tariff-free zone, and end free movement of people into the country.
The London stock market meanwhile advanced Friday as the weak pound boosted exporters.
Frankfurt and Paris however dropped by about half a percent, with traders on tenterhooks before the publication of crucial US non-farm payrolls data.

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