Last week's "flash crash" of Sterling, which took the currency to multi-decade lows (and saw the pound trading below parity with the Euro at some airport exchange booths) was quickly blamed on a "fat finger" mistake by a trader, algorithmic trading mayhem at a quiet time in the global trading day, and so on. Any or all of that may well be true, but the fact that the currency is having one bad day after another once again this week points unmistakably to the underlying cause: fears over the economic impact of Brexit, which have been heightened dramatically by last week's ill-judged speech by PM Theresa May.
Trading algorithms, and the people who create and use them, aren't stupid. They're designed to allow firms to react much more quickly to market movements than human traders ever could. (See Flash Boys by Michael Lewis for an entertaining review of how this kind of trading works, albeit in a different context). Algorithmic trading may have exaggerated the move in the Pound last week, but it didn't set the direction of travel, which was indisputably the result of the market's rapidly deteriorating view of the prospects for the UK economy.
Expect more of the same, especially if there is any truth to rumours that Theresa May would like to see the back of Mark Carney at the Bank of England at the earliest possible date.
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