Everyone who did not sleep on the night from Thursday to Friday (October 6-7) enjoyed a unique spectacle that occurs only once every few years - a catastrophic fall in the pound in just a few seconds.

Just 2 minutes into the Asian session and the pound lost as much as it hasn’t lost since Brexit. The Bank of England began investigating this incident, but, as the practice of such outbursts shows, it will not really find anything. Most professional traders agreed that the problem was the algorithm, which had gone haywire.

The pound lost 6.1% and fell to its 31-year low. There are several reasons - probable human error (fat finger) and trading algorithms, which greatly increased the pressure on sales.

The key to what happened is when exactly it happened - when liquidity in the pound was minimal.

The fundamental factors here are obvious - the pound continues to experience strong bearish pressure after Britain decided to leave the EU. The consequences are also clear - restriction of access to European market and control over immigration, which has reached completely uncontrollable proportions in the EU.

The speed and pace of the pound's decline are signs of the extreme volatility that has become foreign exchange market too frequent a guest. The problem is that institutional forex volumes are falling - and traders are using increasingly greedy algorithms to take a piece of the market. In January this year, the South African rand lost 9% in 15 minutes. Last August New Zealand dollar also suffered his own instantaneous downfall.

What contributes to this?

Low level of liquidity

Specialists from Commerzbank AG explain that the whole point is liquidity, which has dropped significantly over several years, to which government regulators did not pay any attention. On the contrary, measures to regulate the foreign exchange interbank market have led to the fact that the liquidity of the Forex market has become less stable, and the level of price fluctuations has increased significantly. As a result, in some periods - like the Asian session - there is especially little liquidity. There are few buyers and sellers, small volumes - in the market, simply put, there is little money, but there are many people who want to receive it.

The pound fell 6.1%

Representatives of Janus Capital believe that the true reason will never be found. Whether this is a human factor or not, we can only say unequivocally that only algorithmic trading leads to such “special effects”.

One ECN even recorded a transaction at a staggeringly low level of $1.1378. Can you imagine the extent of this decline? All this time, traders from Great Britain slept soundly in their beds and had no idea what was happening.

“I came to work, turned on my schedule and thought there was some problem with my computer” - Stuart Bender, head of the foreign exchange department of Banco Santander SA, shares his sore point.

Position of the Central Bank of England

The Central Bank of England is investigating the incident and considers the fall in the pound to be relatively “normal.” Weekly volatility of the pound against the dollar, as a result, increased to 16.77%, from 10% on Tuesday.

The head of the foreign exchange department of Westpac Banking Corp also noted that the price surge caught the market by surprise and this impulse activated many algorithmic sell orders, which took on an avalanche-like appearance. Moreover, according to major players market, at the minimum, no one really bought the pound.

Traders also recalled the words of French President Hollande that “Britain will have to pay its price for leaving the EU and this price will be high.”

Such comments alone cannot cause such an event. However, they create a suitable emotional background. This, coupled with low liquidity, prepared the necessary conditions for a collapse. And although the pound is now slightly recovering what it lost (just as gaps are almost always filled), according to Macquarie Bank Ltd, its fate is sealed - all supports have been broken and the pound will face a multi-month decline, with no bottom in sight.

Several months have passed since the referendum and the pound has already lost 17% of its value. Which, by the way, led to a revival of exports and helped the country level up budget deficit. It’s always like this, the currency is cheaper - the goods that the country exports are cheaper. At the same time, the cost of imported goods for households and businesses has risen.

Economists predict rising inflation and a likely looser fiscal policy that the government will resort to to address economic problems in the new world after Brexit.

Meanwhile, inflation is growing, which has already reached record levels since January 2014 and is now 3.05%. The British FTSE 100 index grew - naturally, because exporters went to great lengths, taking advantage of the weakness of the pound, which had a beneficial effect on their income.

Rochford Capital Pty, along with several research organizations, are currently sifting through piles of information. They analyze all news sources and Internet resources in search of a potential cause.

In their opinion, the speed of what happened clearly indicates a flash crash - a term that indicates a rapid drop in the value of an asset as a result of an algorithmic surge, accidental or intentional. In their opinion, if the pound does not recover above $1.28, it will inevitably fall below $1.15 in the coming weeks.

Hard Brexit

In Britain there are two options for leaving the EU - soft and hard (hard Brexit). And the number of supporters of the latter is growing. One of them is the country's new Prime Minister Theresa May. Each of her speeches was accompanied by a fall in the pound, since, according to May, the British financial industry will not receive any special preferences as part of negotiations on leaving the EU.

As a result, in 2016 the pound became the main loser among 31 world currencies. He is also strongly influenced by rumors that the weakening economy will lead to a further reduction in the discount rate by the Bank of England, while the Fed, on the contrary, will raise the rate. As a result, companies like Goldman Sachs and AllianceBernstein are predicting a new headache for traders.

Volatility, they say, is becoming frightening. Confidence regarding the stability of the foreign exchange market has been shaken again. So traders who rode the wild ride that night should be prepared for a repeat of this scenario as liquidity levels only get worse.

What does the currency say?

Just as stock prices indicate financial condition companies, currency is a barometer by which we can find out what exactly traders and investors think about the country’s economy and its prospects, especially in terms of the effectiveness of its government’s actions.

As we can see from the pound, the international trading community strongly doubts that the current position of the Conservative Party of Britain and Brexit will benefit the UK economy.

Whatever it is, an error or algorithms, the pound is unlikely to return to previous levels. Apparently, the stuffing cannot be turned back:

The pound never recovered from its fall

Now the favorite game of all traders is guessing how low the pound will eventually fall. Before Brexit, the rate was $1.44, but now it has collapsed to its multi-year level and what’s next - parity with the dollar?

Possible parity with the dollar

A falling currency (okay, it’s not a crisis yet, but it’s getting close) is always an indication of accelerating inflation. What bankers are looking at is the difference in returns between regular and inflation index bonds - and the difference is growing:

Rising inflation in the UK

Rapid inflation = rising prices =, it would seem, an increase in interest rates by the Central Bank. However, the economy can be buried in the process. Therefore, the majority of economists surveyed by Bloomberg already give a 35% chance that Britain will fall into recession in the coming year. If economic growth slows down and inflation accelerates, the country will face stagflation, and this is almost a death sentence.

And even if the current weakness of the pound is temporary and it slightly recovers its fall, there are new challenges ahead. IN financial world there is an effect that markets constantly overperform after they have accelerated. Everything is becoming “too much”, which means that the pound now has practically no bottom. Analysts are already expecting parity with the dollar (1:1) and this scenario is fundamentally at odds with the song about the “strong and stable pound” that British politicians are currently singing.

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For a long time, foreign exchange market participants did not take into account possible consequences referendum on Scottish independence, but the results of recent polls literally shocked the market, and the British pound fell to its lowest level in 10 months.

So, the British currency has shown steady growth since mid-2013. The UK economy has shown good growth rates, so the main driver of the strengthening of the pound was expectations of a tightening monetary policy by the Bank of England. These expectations, by the way, were actively fueled by the regulator itself. In particular, the head of the Bank of England, Mark Carney, has repeatedly stated that a rate hike could happen much earlier than the market expects.

As for the referendum, almost no one took it seriously, at least the market did not take it into account, and almost all polls indicated that the majority of the population was against Scottish independence.

As it turned out, for the time being - as the referendum approached - the gap between those who were “against” and those who were “for” began to unexpectedly narrow, and last weekend there were finally more supporters of independence. There is less and less time left before the referendum. Let us remind you that voting will take place on September 18. The market reaction to these changes was not long in coming, only today the pound fell against the dollar by the maximum amount in a year.

The publication zerohedge suggests considering the consequences that a positive result of the referendum could provoke.

1. Risks to UK economic growth

Uncertainty regarding economic prospects, policies and currency mechanisms, will likely deal a blow to the economy of both Scotland itself and the UK as a whole. Business representatives are likely to take a wait-and-see approach or decide to develop their activities outside the UK. It should not be forgotten that exports to Scotland from UK countries account for approximately 4% of GDP, which means that in the event of secession, Scotland will automatically become the UK's second largest trading partner after the US. If a business does not understand how to conduct business, this will obviously affect trade turnover, and therefore the economy as a whole. In addition, many enterprises and banks operate both in Scotland and in the rest of the UK, and in the event of Scotland's secession, they may begin to significantly reduce their presence on foreign territory in order to minimize the risk of possible currency reforms.

2. Politics

Scottish independence will have a negative effect on the main political parties in the UK and a positive effect on those who favor leaving the EU. Following secession, Scottish officials will no longer vote in the British Parliament, a major blow to both Labor and the Liberal Democrats.

In addition, zerohedge believes that changes in the composition of parliament will also have a negative impact on the position of Prime Minister David Cameron. The beneficiary of such changes will most likely be London Mayor Boris Johnson, who advocates leaving the EU and is Cameron's most likely successor.

3. Uncertainty will take a long time

The Scottish government has said that if the population votes for independence, the authorities will seek to speed up the process of separation, and Scotland will become independent in March 2016. However, experts believe that in practice this process could take much longer. This is also connected with the parliamentary elections in Great Britain in 2015. It is quite possible that after them the composition of the government will be completely different, which means that Scotland will have to negotiate with different people. And in any case, the elections themselves and preparations for them will take some time.

4. ready to act

The head of the Bank of England, Mark Carney, said that in the event of Scotland's separation from the UK, the regulator is ready to make every effort to combat the resulting uncertainty. He noted that the Bank of England has the necessary obligations to provide financial stability and he will continue to fulfill them. Currency uncertainty can create financial instability, and we are already developing possible measures to eliminate them, Carney said.

Based on the above factors, it can be assumed that if the result of the referendum is Scottish independence, the British pound will remain under pressure for quite a long time. And the main factor for this will be long-term uncertainty regarding many points. In addition, if negative risks for the economy materialize, the issue of an imminent rate increase will be removed from the agenda, which means that the British currency will no longer have its former support.

“Brexit” has started: a week ago, British Prime Minister Theresa May put her signature on the official notification to partners that Article 50 of the Lisbon Treaty comes into force, which means London is beginning the procedure for the country’s exit from the European Union.

Until now, not a single member state has left the European Union; Britain is setting a precedent, including in terms of strict adherence to the exit procedure. The article in the Lisbon Treaty that regulates “divorce” is spelled out rather vaguely. What is certain is that a state intending to leave the EU must submit a corresponding application by sending written notification to the head of the European Council Donald Tusk"according to its constitutional requirements" (that was done). And then the EU and the participating country begin to discuss the terms of exit. Negotiations should not take more than two years; until they are discussed, Britain will continue to remain a member of the European Union.

The written application to the European Council was submitted in two copies: one will remain in Brussels, the second, with a stamp and date, will be kept in the archives of 10 Downing Street.

Two years in a dynamic environment modern politics seems like quite a long time. Financial markets, however, are too sensitive to rely on a two-year delay. And the question of what will happen to the British pound after Brexit remains one of the most intriguing. The day after submitting the application to Brussels, the British currency became the market leader in the fall, losing over 100 points.

Forecasts regarding the fate of the English currency by experts, including those working on the Forex exchange in trading platform mt4 are associated with how successful (and how spicy) There will be negotiations between the British government and Brussels officials. The most significant questions seem to be whether the British - EU citizens - will retain all the rights due to them, including the right to freedom of movement, not only in the next two years, but until the process of leaving the union is fully completed. Will the jurisdiction of the European Court remain in the UK, and will financial obligations to EU citizens be respected? (meaning payment of pensions, provision of loan guarantees, covering other financial needs).

Meanwhile, the Brexit bill is on the table. Brussels demands from Great Britain 60 billion euros, which must be paid to the EU budget, and London, in turn, declares that it will not pay. Britain has no legal obligations in this regard, according to the Upper House of Parliament. As a result, both the stabilization of the British pound exchange rate on the forex currency market and the general situation in the markets depend on how compliant and negotiable London shows itself.

An expected complication was Scotland's announcement that the country intends to re-hold a referendum on independence. The separatist sentiments of the Scots do not add stability to the pound. Realizing this very well, Theresa May has already met with the First Minister of Scotland, trying to persuade Nicola Sturgeon"moderate the ardor." So far, there has not been much success on this front: the Scots, known for their legendary tenacity, if they decide to do anything, “they will definitely drink.”

Definitely in the spotlight after he revealed on Tuesday sudden jump up on positive economic data. The pair is already trading above 1.33 today, having touched yearly highs around 1.3314. However, we have not yet received confirmation of a breakthrough.

So, after GBP/USD added 400 points in price in a matter of days, the British authorities decided to intervene. On Monday, Mark Carney did his best to convince markets that everything would proceed gradually and in a limited manner. Moreover, he tried to appeal to where it hurts most - to remind about the problems that consumers, companies and markets will face in the process of the UK's exit from the EU.

This had its effect: GBP/USD bounced off the 15-month high of 1.3618 and corrected to the 1.3480 area. However, if we compare Carney’s efforts and the pullback that the pound sterling did show, we can admit that the market is not ready to dump the British currency.

Investors understand that in the context of a sharp rise in inflation, the Bank of England will inevitably raise rates, and most likely this will happen in the coming months. In such conditions, most traders will prefer to take advantage of the current correction to enter the market at attractive levels. This will lead to a recovery in GBP/USD with the immediate target at 1.3560.

Disclaimer: Past profitability does not mean future profitability. Any forecasts are for informational purposes only and do not guarantee results.

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