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Flash Crash Sends British Pound to 31-Year Lows

Friday, October 7, 2016 5:09
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(Before It's News)

British PoundThe British pound plunged to the lowest levels versus the U.S. dollar since 1985 today, as speculation runs rampant about what exactly caused the sudden and unexpected crash.

Pound sterling fell as low as $1.1819, down 9%, in early morning trading. That marked its lowest level since 1985’s mining industry strike-fueled currency disaster.

At latest check, the pound recovered some of its losses to $1.24, still down 6% from yesterday’s close.

The reasons for the sudden drop are unclear. Some analysts are blaming a “fat finger” error by a trader, while others speculate about a low liquidity sell-off. If a firm closed out a large options position, for example, at a time where there wasn’t much liquidity in the markets to sop it up, it could trigger a large decline that rebounds quickly once the markets wake up to the issue.

Other possible causes for the crash include algorithmic trading moves and fears of a “hard Brexit” — where Britain would quickly leave the EU and sort out much of the details later.

Since this kind of move in a major currency like the pound is highly unusual, it warrants serious observation from investors.

FXB-2016-10-07

The CurrencyShares British Pound Sterling Trust (NYSE:FXB) fell $2.83 (-2.30%) to all-time lows of $120.40 in premarket trading Friday. Introduced in 2006, the FXB is the most popular currency ETF tied to the British pound.

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