There was fresh misery for holidaymakers as the pound crashed by 8%, with analysts still struggling to explain the sudden drop.
While most of Europe was still asleep, the pound suddenly dropped against the dollar. The pound had been struggling following Prime Minister Theresa May’s announcement that she would be triggering article 50 by March next year to start to leave the EU.
That seemed to set analysts and investors on edge and the pound dropped to a 31-year-low. But, it still had further to go. The pound dropped on Friday from 1.26 against the dollar, to 1.1491 in just eight minutes in a market where even a single cent drop is considered a big change.
There were only a small number of trades made during that time, considering that most people were still asleep, so dealers are still unsure what caused the pound to suddenly fall off a cliff.
Theories include that computer-driven algorithmic systems were to blame, with computerised trading systems then causing the slide. As the pound dropped, automated systems kicked in to sell when it reached a certain level. Another possibility being talked about is that it was what is known as a fat-finger error when a mistake is made inputting data in the financial markets, meaning an order to buy or sell stock is placed of a far greater size than was originally intended.
Whatever really happened may never be known but traders and analysts said they had never experienced anything like it. Chief market analyst at Think Markets, Naeem Aslam, said: “What we had was insane. Call it a flash crash but a move of this magnitude really tells you how low the currency can really go.”
The dramatic drop will have hit both investors and companies hard. Sports Direct, which has already been troubled after facing criticism for the way it treats its staff, has already issued a profit warning, saying the company had lost £15m because of the flash crash.
The Bank of England has now launched its own investigation to try to shed some light on what really happened. It has also asked the Bank of International Settlements, which represents central banks across the world, to look into what sparked the fall.
The pound is expected to remain under pressure because of uncertainty which still surrounds Britain’s impending exit from Europe. Apart from the Argentinian peso, the pound was the worst-performing major currency in the world this week and is set to suffer further problems at least until an exit deal with the EU is made.
