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The Pound dipped 6.2% against the Dollar in a two-minute interval, causing panic in Asian markets as US traders closed the day. While it remains unclear what caused the sudden dip, speculations over the subject mention Hollande's speech and "fat finger" trading for what appears to be the latest "Flash Crash".
With a revisit of 1985 lows amid the Asian session opening (7:00 AM Hong Kong Time; 23:00 GMT), the Pound caused chaos in markets, recovering most of the losses over the next ten minutes, but remaining 2.0% beneath the pre-plunge level.
Comments on the United Kingdom exit from the European Union made by the French President Francois Hollande could have served as a catalyst for the sudden dip, creating a snowball effect in algorithmic trading which might have malfunctioned to begin with. Hollande talked tough on trade negotiations for the UK, which triggered an unexpected loss in value, possibly confusing algorithms by pushing through technical support levels and inducing sell-offs. A violation of the round 1.20 Dollar level might have added fuel to the fire, causing execution of stop loss and sell-stop orders. With algorithms consuming liquidity the motion could have intensified the momentum with which the bearish signal was attacked.
A scenario that has won over most of speculators is, however, a "fat finger" trade – a heavy error by a trader or a faulty algorithm- followed by the same snowball effect as mentioned above. Triggered options barriers and stop-loss levels intensified and completed the rest of the plunge, causing a second "Flash Crash", obtaining the name from the original 2010 Flash Crash, which caused a trillion-dollar automated crash which lasted for 36 minutes.
Along with Prime Minister Teresa May's speech, which stated that the UK will begin its journey out of the European Union in March 2017 already, the Pound has had it rough this week, sliding almost eight percent in total.
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