Sterling remains volatile after flash-crash

13 October, 2016

Rob Bastin

In a week that is absent of any key UK data, the pound finds itself dealing with the aftermath of last weeks ‘flash crash’ that took out all the market stops and support levels, leaving Sterling incredibly fragile to further losses in the near term. The last 48hrs has again seen over a 2% swing in sterling exchange rates as extreme volatility levels continue in the markets. On Tuesday night the Pound dropped below 1.10 on the Euro and below 1.21 against the USD, the lowest level for Sterling in history on a trade-weighted basis according to the Bank of England. Rates were however able to make a small recovery which was attributed to the latest comments from Theresa May, who indicated that there will indeed be a ‘full and transparent debate’ in parliament to discuss the details of the plan to leave the EU once it is triggered in March 2017. This was seen to temporarily boost investor confidence although the gains were already being eradicated by close of business yesterday such is the selling pressure on Sterling currently.

Wednesday’s eco-stat were focussed on the Euro-zone with their latest Industrial Production figures for August, which posted a better than expected figure of 1.6% growth, comparted to 0.7% contraction the previous month. Annual growth was also up at 1.8% against forecasts of 1.5%, continuing a running theme currently of a gradual recovery in the Euro-zone that could support rumours of the ECB tapering their QE programme in the coming months.

After the UK session closed all eyes were on the FOMC minutes for any indication on how likely another US rate hike would be in December. Previously this was suggested to be a 61% chance, however softer data in the labour market recently has led to the market reducing this expectation and increasing the chance of a delay until next year. Markets therefore expected a widening of opinions from committee members that would support this possible delay although the actual minutes showed that the decision not to raise rates this month was ‘a close call’ with 3 members preferring a 25 basis point increase. Other members did indeed site the slackness in the labour market as reason for holding on but agreed that a rise very soon would be warranted should these figures show further improvement. This has ultimately lead to a stronger dollar overnight as the markets continue to price a likely 0.25 hike at the December meeting, with November being extremely unlikely given that the decision falls just days before the Presidential vote, another factor that could sway the FED’s decision with a Clinton win seen as best scenario to support further policy tightening.

The day ahead has a quiet morning with a few US releases due after lunch including Jobless Claims figures and Import/Export Price Index. Mark Carney is also due to speak today and as ever the markets will be watching closely for his input on recent events.