Sept 26 (Reuters) – Sterling’s drop is worse than a flash crash, two of which have been seen since the term “Brexit” first spread in 2015 and were followed by rapid recoveries. It’s unlikely pound will sustain any recovery in the near-term with a drop below parity set to exacerbate bearish sentiment exponentially.
Flash crashes occur in thin liquidity, and it is the reaction of traders and investors who are largely absent during the crash that matters.
They have been present throughout sterling’s current decline, however, which is happening under normal conditions. There won’t be a rebound until the factors undermining sterling change.
The pound’s rapid decline in the last few days followed the UK’s mini budget but has its roots in the changing US monetary policy which triggered a drop from 1.4250 last year when taper talk first emerged.
The drop in sterling’s value will fuel fears about the extent of the damage Brexit and COVID-19 have wreaked on the economy but have been masked by massive spending during the pandemic.
The extent of sterling’s drop will force anyone with interest in its value to adjust to hedge for a deeper fall and there is a high probability of enduring weakness.
(Jeremy Boulton is a Reuters market analyst. The views expressed are his own.)