Sterling dives on mini "flash crash" – before it recovered back above $1.30

The pound suffered a mini “flash crash” against the dollar in evening trading last night, leaving traders scratching their heads for the third time since October as to what was driving the sharp movement.

The pound jumped above $1.30 against the US dollar on Thursday for the first time since September. That level didn’t last long before the almost instantaneous dip just after 6:30pm sent sent it back below $1.29, a fall of as much as 0.8 per cent.

Within minutes the pound had recovered most of the ground lost, although still well below the $1.30 level. It has since recovered to trade above that mark once more in Friday morning trading.

The move was not linked to any major data releases – such as the big rebound in retail sales that had earlier in the day spurred the upwards momentum – and news flow does not seem to offer any explanation.

Any attempts to pinpoint the reason behind the move are “pure speculation” at this point, and is likely to remain that way given the structure of the global currency markets, according to Jordan Rochester, a foreign exchange strategist at Nomura.

While the forex markets are the biggest and most liquid in the world, the proliferation of algorithmic trading in the last decade has increased the potential for big moves. Neither can so-called fat finger errors, where a trader accidentally makes a market-moving trade, be ruled out.

“It could be a whole host of things,” Rochester said. “The market’s a bit more used to it.”

The pound/dollar pair is the third most traded in the world, according to the Bank of England, but even then it can be vulnerable to quick movements, particularly when most traders have gone home for the day.

Kit Juckes, global strategist at Societe Generale, said: “I have no idea why this happened but it continues to throw out warnings about what is happening to market liquidity in general outside peak trading hours.”

Lower liquidity means individual players in the market can have a bigger influence – potentially making currency pairs more volatile.

However, Thursday’s movement was not on the scale of earlier “flash crashes”. In October, just a few days after sterling fell below $1.30 for the first time in more than three decades, the pound crashed by more than nine per cent against the dollar.

An investigation by the Bank for International Settlements found that movement was caused by a “confluence of factors catalysing the move, rather than [...] a single clear driver.” (The BIS lived up to its reputation as the “central banks’ central bank” by calling it a “flash event”.)

The relatively elevated level of the pound may also have had an influence, according to Kathleen Brooks, who cautioned last night’s movement did not have the same hallmarks of previous dramatic “flash crashes”.

This kind of unexplained movement is unlikely to go away any time soon, despite the interest of regulators including the Prudential Regulation Authority (PRA), which is set to launch a new voluntary code for forex dealers.

Brooks said: “The balance between buyers and sellers can get out of whack sometimes.”

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