Pound sinks again after suffering mystery 'flash crash' when it appeared to drop 10% in seconds before rogue trade was cancelled

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The Bank of England said it was investigating the pound's mystery 'flash crash' overnight, when it appeared to dive by 10 per cent in seconds before swiftly recovering, as Asian stock markets opened.

The flash crash was followed by the pound sinking further against the dollar and euro today, in a volatile day's trading.

Traders watched nervously last night after the sudden plunge in sterling took it to fresh 31-year lows, however, what was believed to be an outlying rogue trade that took the pound down from around $1.26 to $1.1378 was later cancelled.

The low for the pound was then revised, although this still delivered a crash of 6 per cent to $1.18 in a matter of minutes, before a recovery to $1.24.

The pound suddenly dived 6% against the US dollar - from about $1.26 to $1.18 - even with the outlying rogue trade cancelled, as this chart from Bloomberg shows

Market commentators suggested a rogue ‘fat finger’ trade, or chain reaction triggered by a news-driven algorithm reacting to comments from French President Francois Hollande, as possible causes of the flash crash.

'We are looking at the causes of the sharp falls over night,' the Bank of England said in a statement. 

At 4.30pm London time, the pound was trading at $1.242 – down 1.6 per cent. Against the euro it stood at €1.112, down 1.8 per cent. During the day it sank as low as $1.225 and 1.093

Those changing money into euros at some UK airports are already getting just €1 to £1. 

Sterling sentiment took a further hit today from an HSBC analysts' note suggesting that the pound could fall to $1.10 by the end of 2017 and parity with the euro.

David Bloom, global head of FX research, said in a note: ‘The argument which is still presented to us - that the UK and EU will resolve their difference and come to an amicable deal - appears a little surreal.

‘It is becoming clear that many European countries will come to the negotiation table looking for political damage limitation rather than economic damage limitation.

‘A lose-lose situation is the inevitable outcome. The pound 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 tumble last night came after Mr Hollande had commented that Britain must suffer for leaving the EU and should not get an easy ride on Brexit.

This added extra pressure to the pound, which has already slumped this week following British Prime Minister Theresa May's announcement that Britain would trigger the process of leaving the EU, through invoking Article 50, by April 2017.

Kathleen Brooks, research director at spreadbetter City Index, said: 'Apparently it was a rogue algorithm that triggered the sell-off after it picked up comments made by the French President, Francois Hollande, who said if Theresa May and co want hard Brexit, they will get hard Brexit.

'These days some algos trade on the back of news sites, and even what is trending on social media sites such as Twitter, so a deluge of negative Brexit headlines could have led to an algo taking that as a major sell signal for GBP.

'Once the pound started moving lower, then more technical algos could have followed suit, compounding the short, sharp, selling pressure.'

Freefall: The pound has fallen to its lowest level against the US dollar since 1985

Despite the overnight roller-coaster ride for the pound, the FTSE 100 opened up today, trading up 0.6 per cent at 7,042.5 at 4.30pm.

This would follow a pattern that has seen the leading London stock market rise, as the pound has fallen against the dollar.

That trend derives from the international make-up of the FTSE 100, with many of its giant companies earning substantial amounts overseas. The decline in sterling will flatter future profits as they are translated back into pounds.

Mike van Dulken, at Accendo Markets, said: 'A positive  is rather perversely derived from a 6 per cent overnight flash crash in GBP that has provided the UK index with another currency fillip for its overseas-exposed contingent.

' Blame is being pinned on a cocktail of; 1) timing (late US, early Asia trading lull); 2) Thin volumes ahead of this afternoon’s US Jobs report; 3) hardball Brexit talk from French President Hollande reviving fears after the UK PM’s own speech this week, and, 4) Assumptions of a ‘fat finger’ error and/or automatic trading/stops being triggered.' 

This chart shows how the FTSE 100 (green line) has risen as the pound has fallen against the dollar (blue line) since the Brexit vote

In yesterday's trading, sterling hit a fresh 31-year low against the US dollar as investors fretted over the prospect of a 'hard Brexit' following Britain's vote to leave the European Union.

The pound fell to as low as $1.2623 at one stage and €1.13 against the single currency on another brutal day.

The slump follows Theresa May's pledge this week to trigger Article 50 by March next year – paving the way for a so-called 'hard Brexit' that would pull the UK out of the single market as well as the EU. 

The rout in sterling this month – down more than 2.5 per cent against the dollar in the first week of October alone and 15 per cent since the EU referendum – has come despite more upbeat economic news.

Figures this week suggested the economy grew by 0.3 per cent in the third quarter, and the International Monetary Fund said the UK would be the fastest-growing nation in the G7 this year.

A report out today shows confidence among British businesses is back at pre-referendum levels, up to 112.4 last month from 109.7 in August.

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