What Was the Sterling Flash Crash?

Posted by Allison on 28 October 2016, 15:09

It comes as no surprise to learn the British pound has been in a state of flux ever since the Brexit vote happened way back in June. But something happened on 6th October that still has some people scratching their heads.

This was called the sterling flash crash – a dramatic and rather quirky name given to something that was quirky in itself. In just two minutes during the latter part of that day, the British pound fell in value by 6%. Beforehand, it was sitting at around $1.26 against the US dollar. Next, in a blink-and-you-wouldn’t-have-missed-it moment, it dropped like a stone to $1.18. Thankfully, it did then recover – at least partially – to get back to $1.24, although it took around half an hour to do it.

So what happened? No one seems to know for certain yet, although the Bank of England was looking into it. There was speculation that it might have been something to do with a computer glitch, but no more news has surfaced on this particular theory.

Interestingly though, at the time of writing (late October), sterling is now worth around $1.22 against the US dollar. So it’s dropped lower again, although not as low as the flash crash saw it go.

In the end, we may never know for sure what happened. The British pound has been volatile, to put it mildly, since the Brexit vote took place. According to those in the know, there has been a drop of 14% against the US dollar since we voted for Brexit back in June. That’s a hefty drop, and sterling shows no signs of improving anytime soon. In fact, it could well drop lower still.

Some believe we may eventually see it gain parity with the US dollar. It’s hard to believe we could ever exchange one pound and get one dollar in return, but we have to admit it is a possibility. Furthermore, you might wonder how long this might take to achieve (if indeed it is an achievement).

It would be good news for American tourists looking to get a value holiday in this country, so it might be good for tourism. But other businesses will struggle, depending on the exchange rate and how they might benefit from it (or not). One thing is for sure – the sterling flash crash is still being looked into, and no news on how and why it happened seems to be coming our way anytime soon.

The current rate of exchange against the US dollar is the lowest we have seen for sterling in a little over three decades. Few people will remember the last time you got so little for your money – at least if you’re a Brit looking to exchange your currency for dollars. We’ll be watching to see if the pound drops further in the near future.

 

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