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Sterling flash crash and dollar performance remains key

There have been some significant moves on markets in recent weeks, but the “flash crash” on sterling tops the lot. With the recent strong performance of the dollar, key moves have also been coming on dollar forex pairs in addition to commodities and equities. As traders look ahead towards the Presidential Election, a potential Fed hike in December and continued concerns over Brexit, we look at the positioning on key markets this week.

broken sterling

There are still several theories being banded around for the reasons behind the sterling flash crash. An article in the FT reporting comments from French President Hollande which appeared to suggest the EU could be ready to play hard ball over Brexit. The move may well have been triggered by computer algorithms but the selling came at almost the worst time of day in thin Asian trading and the decline triggered a series of options barriers at $1.2500 and then $1.2000, only to start to bounce back after a couple of minutes. Ultimately though sterling is weak due to a number of factors. A significant driver has been the dollar strength coming at the same time that the potential for a “hard Brexit” (an exit from the EU that chooses to focus on limiting the freedom of movement of people rather than the single market and the associated negative impact on the current account and economy). The UK’s expanding current account deficit has been a concern and trade data out on Friday morning over the worsening trade deficit despite the sterling weakness do not help to settle nerves for traders. Technically a downside target of $1.2150 can easily be derived and achieved over the next few months (but perhaps earlier). The question is who would be brave enough to buy sterling right now. The old adage of technical trading is to never catch a falling knife. Expect lots of volatility both ways as the markets settle into new levels. The wild ride is likely to continue this week.


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