Pound to US Dollar Exchange Rate Under Pressure After GBP Flash Crash

Modified: Friday, 7 October 2016 17:05 BST - Written by John Cameron

STORY LINK Pound to US Dollar Exchange Rate Under Pressure After GBP Flash Crash

Pound Flash Crash Exacerbated Brexit-Based Worries

During Friday’s Asian session the Pound (GBP) was subject to a flash crash, which saw it fall 6.1% against the US Dollar (USD) in the span of two minutes.

Sterling rebounded quickly from this apparent fat finger trade, although the currency remained biased to the downside thanks to fresh comments on the subject of Brexit.

Both French President François Hollande and European Commission President Jean-Claude Juncker took a tougher line with regards to the UK’s exit from the EU, with the point being reiterated that single market access cannot be divorced from freedom of movement.

This seemed to raise the odds of a hard Brexit and, coupled with a surprise widening of August’s trade deficit, kept the Pound under pressure throughout the European session.

Disappointing US Payrolls Weakened US Dollar with Lowered Fed Hike Odds

On the other hand, the US Dollar suffered a slump in demand as a result of September’s Non-Farm Payrolls report.

Following better-than-expected jobless claims figures on Thursday investors had positive expectations for the labour market data, leading to pronounced disappointment when the headline figure fell short of forecast.
Researchers at BBH commented:

‘As we noted the initial estimate in September has typically disappointed since the financial crisis. However, we had thought this time could be different because of a number of other reports, including weekly jobless claims, jobs availability, payroll withholding, payback due to weather in August, and the monster rise in the employment component of the service ISM.’

This softer showing put a dampener on speculation that the Federal Reserve could raise interest rates as soon as November, helping to boost the GBP/USD exchange rate as investors unwound bets on an imminent return to monetary tightening.

Sparse UK Data Week Could Undermine GBP/EUR Exchange Rate Further

With UK data rather limited in the coming week the Pound is expected to remain vulnerable to further downside momentum, with little to distract from Brexit-based anxiety.

Should politicians continue to express rhetoric in line with a hard Brexit outcome then the GBP/USD exchange rate could see additional weakness, with fresh 31-year lows possible if investor sentiment deteriorates.

Confidence in the US Dollar could improve if Fed policymakers remain generally hawkish and continue to support the idea of a 2016 interest rate hike, although markets may prove sceptical of such commentary if domestic data remains discouraging.

While traditionally low in impact, both the NFIB Small Business Optimism Index and Labour Market Conditions Index Change results for September could offer the ‘Greenback’ a rallying point if they prove positive.

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