The British pound suffered a sudden fall of more than 6 per cent against the US dollar early on Friday before recovering most of its losses, amid mounting concerns over the UK’s exit from the EU.

Shortly after currency markets opened in Asia on Friday, the pound lost as much as 6.1 per cent to $1.1841 in two minutes. The shortlived drop sparked speculation that it could have been triggered by a mistaken “fat finger” trade or a rogue automated algorithm, exacerbated by thinner liquidity during early Asian hours.

It was the currency’s lowest level since May 1985 and the biggest intraday drop against the dollar since its 11.1 per cent plunge on June 24 in the wake of the UK’s vote to leave the EU.

Although sterling quickly bounced back, it was still trading down 1.8 per cent at $1.2381 in London afternoon trading, well below the $1.26 levels it was holding at before the plunge. Against the euro, the pound was 2.1 per cent weaker, with £0.9018 required to buy a unit of the single currency.

The weaker pound also intensified this week’s selling of UK government debt. The yield on 10-year gilts rose above 1 per cent for the first time since late June, and the benchmark has climbed from 0.73 per cent on Monday. Foreign investors own about one-quarter of outstanding gilts and their holdings lose value as the pound weakens.

“I’ve been trading sterling since 1978 through every crisis it has seen, and I’ve not seen anything like this,” says Ian Johnson, FX strategist at 4CAST-RGE, the consultancy.

Friday’s fall added to a torrid week for the British currency, which has slipped 4.6 per cent since comments at the weekend from Theresa May, UK prime minister, that the formal proceedings to take the UK out of the EU would begin no later than March next year.

Traders said the tough stance taken over Brexit negotiations by François Hollande, French president, reported by the Financial Times, could have triggered the move. Many algorithmic traders include tracking news websites in their systems. The FT story was first published the same minute as the move lower began.

“The UK has decided to do a Brexit, I believe even a hard Brexit. Well, then we must go all the way through the UK’s willingness to leave the EU,” Mr Hollande said.

The pound’s drop occurred at the weakest moment in the trading day, after New York traders had left their desks and as Australian and Japanese markets were getting under way. The US jobs report due later on Friday — a risk event for markets globally — has also lowered trading appetite, thinning volumes further.

Chart of Sterling flash crash

Rodrigo Catril, a strategist at National Australia Bank, attributed sterling’s drop to an “algo trade that needed to be filled, combined with a lack of liquidity and someone hitting the stop — or exit — level”.

Financial markets have become increasingly driven by automated trading in recent years, and glitches can occasionally cause sudden, hyper-fast crashes and rallies. Notable examples include the 2010 “flash crash” in the US stock market and a violent rise in Treasury bond prices in 2014.

Mitul Kotecha, head of Asia currency and rates strategy at Barclays, said: “It was the point of thinnest liquidity for this to happen, for sure. But there were real trades done at some of these weak points, so people were clearly prepared to believe in sterling’s new weaker levels.”

Establishing the actual low for the pound during the frenetic two minutes of trading remained problematic, given that currencies are traded on dozens of different platforms and the levels each shows reflect the trades that are conducted on those systems. Normally this not a problem as prices tend to be the same across different platforms. For holders of options and other currency contracts, big differences in the recognised low price across platforms may prove costly as they seek to settle their positions with banks or other traders.

Michael Every, the head of Asia-Pacific financial markets research at Rabobank, said: “We all expect market volatility on a payrolls Friday . . . what we don’t usually get is a flash crash in [the pound], which plunged from an already-weak 1.2610 to an ‘I-can’t-believe-what-I’m-seeing’ 1.1841.”

“Officially, the excuse is failing algos, which is the new, high-tech version of fat fingers.” At its worst on Friday, the pound fell as much as 7.3 per cent against the Japanese yen, and as much as 3.4 per cent against the euro.

However, JPMorgan strategists questioned whether algorithmic traders were behind the crash.

“Many investors it seems were awaiting clarity from the government about what type of Brexit it would prioritise, and many presumably were hoping for a softer Brexit that minimised the longer-term economic damage,” said analyst Paul Meggyesi. “But such hopes were dashed at the Conservative party conference last weekend, and it’s not unreasonable to attribute the subsequent 4 per cent drop in the pound to some of these investors starting to reassess their positions.”

David Bloom, chief currencies analyst at HSBC, said he was happy to stick with his prediction that sterling would trade at around $1.20 at the end of the year, and then $1.10 by the end of 2017, with the pound at parity to the euro.

“Sterling used to be a relatively simple currency that used to trade on cyclical events and data, but now it has become a political and structural currency. This is a recipe for weakness given its twin deficits. The currency is now the de facto official opposition to the government’s policies,” he said.

“The FX market is exhibiting an uncanny resemblance to the five stages of grief. First, following the Brexit vote came the denial — theories circulated whether a second referendum would have to take place. Second was anger — claims the vote was unfair. Third was the bargaining — arguments maybe it wouldn’t be that bad, what if the UK followed the Norwegian or Switzerland model. Now the fourth — a gloom is prevailing over sterling.”

Reporting by Peter Wells and Jennifer Hughes in Hong Kong, Katie Martin in London and Robin Wigglesworth in New York

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