Last October, the British pound experienced a mysterious flash crash that wiped 10% from its value. This included a more than 6% drop in the span of two minutes, bringing sterling to its lowest level in 31 years. Baffled by what transpired, market participants have given several theories about what caused the dramatic drop.
Rogue computer trades, an accidental “fat finger” and harsh comments from French President Francois Hollande on Brexit negotiations were all blamed.
A few months later, the Bank for International Settlement (BIS) found there was no single trigger for the colossal drop.
The flash crash wasn’t a “new phenomenon,” the BIS said in a report that was released the following January. “Rather, it represents an additional data point in what appears to be a series of flash events occurring in a broader range of fast, electronic markets than was previously the case, including those markets whose size and liquidity used to provide some protection against such event”.
For all the mystery surrounding the flash crash, there certainly wasn’t any secret behind the pound’s woes. Just three-and-a-half months prior, Britons voted to leave the European Union (EU) in a watershed moment that would reshape the future of the pan-European project. Although the pound has rebounded some 1,400 pips since the flash crash of last October, it’s nowhere near pre-Brexit levels.
With the Bank of England (BOE) signaling for higher interest rates, the probability of another crash in the pound is slim. Meanwhile, the prospect of a hard Brexit has sorely diminished following Prime Minister Theresa May’s election gaffe. As a matter of fact, EU talks are breaking down before our eyes, leaving the British pound safe from any other politically charged selloffs.
Pound sterling has also benefited this year from a whimpering U.S. dollar. The greenback is one of the world’s worst-performing currencies of 2017, having declined more than 8% year-to-date.
Although investors shouldn’t get ahead of themselves with respect to the pound, there doesn’t seem to be any impetus for a repeat of last October’s selloff anytime soon. Of course, the forex market is highly unpredictable, so it’s best to keep your wits about you.