Sterling flash crash shocks markets...

Week Commencing Monday 10th October 2016

 

UK: Rogue Algo kills the market

The pound has endured a temporary collapse in value to new 31-year lows, sparking market chaos and a Bank of England probe.

The Pound traded as low as 1.26 against the Dollar on Thursday, however it slumped to 1.18 within minutes during early Friday morning trading, dropping as low as 1.14 briefly (9 percent down on the day). Once markets calmed down, the rates settled at the 1.24 level before slowing tracking down to 1.22 as New York opened on Friday afternoon.

There are many potential culprits of this flash crash, however the most probable at the moment is a rogue algorithm that uses news feeds to dictate buying or sell signals. Late Thursday evening Francois Hollande warned that the UK “must pay the price for a hard Brexit”, pushing the market into free fall. This would not be the first time a algorithm has caused a market crash, the famous US stock market flash crash in 2010 and the extreme spike in US Treasuries in 2014 all have algorithmic trading to blame.

Either way, Sterling’s sharp decline has spooked markets and has cemented investors belief that Sterling is destined for parity against the Euro and 1.10 against the Dollar. Hold on tight, it’s a long way down!

UK: The word "Soft" is definitely not in Theresa May's vocabulary!

Theresa May left the country in no illusion as to her vision of a post-Brexit Britain, and there is nothing soft about it!

Last week’s conservative party conference saw the Prime Minister call for a “Hard Brexit”, where the UK severs all supranational ties with Brussels and negotiates a new bilateral trading relationship with the bloc. This has spooked markets hoping for a “soft” or “Norway/Switzerland” style relationship with the EU, whereby the UK would maintain full or partial access to the single market.

Although no terms or red lines have been discussed, the tone implies that the UK government are attempting to push for a Canadian style Free Trade Agreement, whereby free movement of people would not apply. All in all, this was a Conservative Party conference to remember! Brexit is Brexit and Theresa May holds all the cards!

 

FX Forecast

EUR/USD remains relatively flat as Sterling takes all the punches. 1.1278 remains our high side resistance level while 1.0980 seems to be the current support level for the pair. We expect this range to be actively traded this week in the absence of any major EU data.

GBP/USD plummeted on the back of a rogue algorithm on Thursday, so all new support and resistance levels remain very delicate. Outlook remains bearish, with 1.20 appearing as the most likely psychological barrier to further Dollar gains. We expect the pair to continue to hover between this and 1.2550 depending on US Retail Sales this week.

GBP/EUR also collapsed on the back of Thursday’s shenanigans, with the pair now resting at the 1.11 pivot. We expect Sterling to continue to trade with the bears, with 1.10 a likely support level. Technical resistance remains at 1.1463.

 

Economic Calander for the Week

UK Data:

We have a very light week for Sterling with no releases of note for the week. Most eyes will be on the SNP (Scottish National Party) conference this week and any hint of another independence referendum will likely put Sterling back against the ropes.

US Data:

We have a busy week for the US, especially as Monday in a US bank holiday (Columbus Day). We await the FOMC meeting on Wednesday where any hint of further rate rises will continue to support the US Dollar.

Friday is a busy day with both Core and Non-Core Retail Sales, PPI and Janet Yellen speaking to the Boston Fed Conference. We expect all of these releases to be more bullish than expected, with retain sales pushing 0.6 percent and 0.4 percent (core) respectively.

EU Data:

Much like the UK, there is little in the way of European data out this week. All eyes therefore remain on the geo-political scene with any further Brexit talk likely to impact EUR/USD and other European currencies.

 

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