Last night the Pound has suffered a flash crash, most likely triggered by a news-flow based trading algorithm. It appears clear now that the triggering news was a Financial Times article in which French President, Francois Hollande very strongly advocates hard negotiations with the United Kingdom over a Brexit. His words can be interpreted to mean that the United Kingdom should be used as a warning of other countries that are thinking of leaving the EU. The IN_GBPUSD broke the 1.26 level with high momentum, what in turn triggered next algorithms based on momentum indicators. The outcome has been that the Cable slipped to 1.1841 (source: Bloomberg). A movement of similar size as after the Brexit vote. The following market reaction showed however that this was not a long term movement. The Cable rebounded within a few minutes to a trading range between 1.24 and 1.25.
Two points should be stressed
On the one hand: An algorithm is always only as good as its programmer. The news-flow focused algorithm gave the starting shot, but the major damage was actually caused by the algorithms that followed. During a normally low-volume trading session, cascading sell orders has been triggered off. The programmers did a poor job here.
On the other hand: The events of the night show us that the level around 1.20 could possibly be the next support level. The headlines from Paris were not really a surprise. It has long been known that we can expect a hard pace set by the EU, in particular since Britain’s Prime Minister, Theresa May, recently dismissed the free movement agreement. The supporting purchase orders at 1.20 are now a new bottom. The market might still react nervously to any political Brexit-related news in the next few weeks and retest the level of 1.20 GBP/USD.