The Bank of England said it will “look into” the sharp plunge of the currency after sterling dropped more than 6 per cent today.
A Bank spokesman told Fund Strategy the central bank is trying to find out why the pound saw a dramatic fall early this morning by gathering “markets participants” to discuss the dramatic movement.
He says: “We don’t regulate the FX market and won’t intervene directly, it’s a question to find out why it happened. However, it looks like a one off event due to the structure of the market and how it trades.”
Since this morning fall, sterling has recovered from $1.1841 but is still trading low at $1.2427.
Hargreaves Lansdown senior analyst Laith Khalaf says despite the fact sterling has restored “pretty quickly” after last night the pound is still under pressure.
He says: “The Bank of England should look at whether there is a systemic issue that may come back. The regulator should see what causes these blips especially if this goes longer than two minutes, when it is not just a ‘flash crash’ but a crash.”
The Bank has already warned markets on sterling’s slump as in its latest Financial Stability report following sterling’s largest two-day fall against the dollar after the EU referendum.
GAM investment director Tim Haywood says the dramatic fall of the pound relates to a “higher than ever” level of algorithmic machines in the FX market and the much smaller participation of investment banks in trades.
He says: “This is most evident during trading times when much of the global investment decision-making community are not at their desks, such as the ‘Asian time zone’.”
Haywood says: “Speculators have had a short bias in GBP for some time. However, the pervasiveness of the position and lack of material weakening since the end of June had caused some nervousness: shorts were trimmed and options adopted, courtesy of lower realised volatility.
“Then there was last night – a move of such magnitude and speed that working out what traded at what level in the market becomes intensely debated.”