The pound has hit a new 31-year low as traders warn 'we haven't seen the bottom yet'

THE POUND SUFFERED a “flash crash” in Asia today on a computer-generated sell-off in the beleaguered currency, as tough talk from French President Francois Hollande underscored the perils ahead for Brexit-bound Britain.

The magnitude of the 6% plunge showed there was likely further volatility ahead for sterling, which has been hammered this week after Britain’s Prime Minister set out a timetable to leave the European Union.

In early trade, the pound fell off a cliff to hit a 31-year low of $1.1841 before immediately rebounding to around $1.2450.

The euro also hit a seven-year-high 94.15 pence, before easing slightly, as minutes from the European Central Bank indicated it is unlikely to trim its stimulus any time soon.

Speaking Wednesday, Hollande said the EU should take a tough line with London during exit talks in order to prevent the break-up of the bloc.

“There must be a threat, there must be a risk, there must be a price, otherwise we will be in negotiations that will not end well and, inevitably, will have economic and human consequences,” he said.

“Britain has decided on a Brexit, I believe even a hard Brexit. Well, we must go all the way with Britain’s willingness to leave the European Union. We must have this firmness”.

French President Francois Hollande

Flash crash

IG Markets’ analyst Angus Nicholson said it “looks like it was an algorithm-driven flash crash” driven by the comments from Hollande. “Given low volumes in the Asian session, it would have forced other algorithms to join in and magnify the fall”.

And Jeffrey Halley, senior market analyst at OANDA, added: “Following comments this morning from … Hollande demanding ‘tough’ Brexit negotiations, GBPUSD finally managed to break $1.26 support.

“What followed next was nothing short of astounding.”

British Prime Minister Theresa May outlined a timetable at the weekend for Britain to leave the European Union by 2019, sending the pound plunging against its major rivals throughout the week.

It is now down around 14% against the dollar since the EU exit vote, though it is still well off its record low of $1.05 seen in early 1985.

Insane

“What we had was insane – call it a flash crash – but the move of this magnitude really tells you how low the currency can really go,” Naeem Aslam, chief market analyst of Think Markets wrote in a commentary.

“Hard Brexit has haunted sterling,” he said, according to Bloomberg News.

British Prime Minister Theresa May

While the British economy has shown signs of improvement in the months since Brexit, there are concerns about the wider long-term impact on the bloc losing its second-biggest economy.

Yosuke Hosokawa, head of FX sales team at Sumitomo Mitsui Trust Bank, warned: “We thought today’s plunge was a matter of time.

“Negative factors were mounting against the pound, and eventually the dam broke. We have not seen the bottom yet. Breaking the 31-year low is now in sight.”

The next test for sterling will come later in the trading day when the US is due to release a key jobs report, with a healthy reading expected to strengthen the Federal Reserve’s case for hiking interest rates before the year’s end.