In recent years, there has been much talk of “flash crashes” and the political backdrop in GBP, which had already fallen sharply after the shock of the referendum result, created the market conditions for such an event in early October 2016 with the pound dropping 6% in minutes. The sharp, temporary fall was attributed to several potential causes, including a so-called “fat finger” error and over-zealous algorithmic trading.
Whatever the cause, flash crash incidents in recent years has resulted in spreads growing wider and impacting on those payment processes which relies on fixed rates held for 24 hours as the risks of liquidity events are priced in. Deutsche Bank’s solution that uses real-time streaming prices for cross border transactions can eliminate this spread, reducing costs for clients.
Leigh cited the Bank of England’s 0.25% base rate hike in November 2017, preceded by widespread expectation in the market of an increase, as the only non-political event to cause GBP price movement in the past three years. He added that the most recent sell-off of the currency, which earlier this month briefly fell below the US$1.20 level for the first time in three years, had involved relatively light trading volumes.
In addition to its depreciation against USD, GBP has also been weak against the Japanese yen (JPY) post-referendum, reflecting the fact that the currency is widely used for positioning on funding and also Japan’s prolonged era of low-to-zero-to-negative interest rates. The decline against the euro has been less pronounced as the FX markets are indicating that they expect Brexit to impact more heavily on EUR than on USD.