Monday, 10 October 2016

Pound unable to recover losses after Friday's 'Flash Crash'

Good morning. As I'm sure most of my readers have noticed by now, Sterling took a hammering at the end of last week and on a trade weighted basis is now the lowest it's been since 2009. A 'Flash Crash' wiped about 10% off the value of the Pound in a few minutes, the biggest fall since the EU referendum, and has been put down to an error in a trading algorithm. I'm not sure about that, as if that were the case you would have expected the Pound to recover those losses during Friday as investors realised it was a trading error. My view is that someone somewhere made a huge amount of money on Friday.

Initially it looked like a recovery was on the cards, but the Sterling sell off continued, and at the time of writing GBP/EUR is now at €1.11, and GBP/USD at $1.24. Wow. Below shows the sharp fall in GBP/EUR rates over the last month (click here for live charts):


The reason Sterling has been unable to recover it's losses is the fact that the markets have now realised that the UK is really going to be leaving the EU, and leaving earlier than most had thought, and in a more drastic fashion than most analysts had thought was going to be the case. It's looking more and more likely we are giving up free access to the single market in order that we can gain full control over our laws and borders.

Will the Pound recover and go back up?


I think it's unlikely. No sane investor is going to be backing the Pound while uncertainty over the UK economic outlook remains, and that uncertainty is likely to remain well in to next year. I've been saying for some time that it's likely the Pound has further to fall, and the decline could well continue. At some point the Pound will bounce back, however I think that's likely until the market has a clearer idea of what the UK economy is going to look like once we've left the EU.

In my last post on Thursday which you can read here, I outlined what you can do and some options you can consider if you are converting Pounds to another currency, or repatriate a foreign currency back to Sterling. This analysis stands as a good outline of what options you have to ensure you don't get caught out by adverse rate movements.

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