Analyst says Algo Trading Behind British Pound's Heavy Losses Against Euro and US Dollar
Automatic trading programmes may have been behind the outsized slump witnessed in Pound Sterling over the course of the past 24 hours.
There was something strange about Sterling's notable slump on Tuesday the 20th September. The declines - in some cases well over 1% - occurred as foreign
exchange markets were happy to trundle sideways with two big central
bank meetings lying ahead. The Pound was at one stage 0.6% lower against the US Dollar and Euro
but 1.16% against the higher-yielding New Zealand Dollar and 1.4%
against the South African Rand. There were no major headlines to attribute the sudden lurch lower
which has lead to one analyst pointing the finger at automated trading
programmes. "Sterling is broadly lower for no obvious reason. There have been no
data reports today. UK gilts are out-performing, meaning UK yield have
fallen relatively more than elsewhere, which may be dragging on the
GBP’s performance," says Shaun Osborne at Scotiabank. "GBP/USD slide below 1.30 was reportedly driven by algo selling which managed to trigger stops below the figure," says Osborne. Selling in GBP/USD here will certainly have been felt right across
the British Pound complex where similar action will have been
experienced. We also warned that it is important for those watching Sterling to stay calm and watch for a recovery into the close. This did indeed happen against many pairs and while GBP/USD remains
below 1.30 we note GBP/EUR is back above 1.16 and is virtually unchanged
over the past 24 hours.The key support levels agianst the Euro have held as expected.
Nevertheless, there remains an elevated risk of further losses from here.
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Pound Sterling has slumped sharply right across the foreign exchange market with no obvious catalyst leading one analyst to blame automated trading for the slump.
Markets were comfortably trundling along on Tuesday when suddenly the trapdoor was opened from underneath Sterling's legs.
A sudden slump in the UK currency has seen it fall through the $1.30 and €1.17 floors.
The losses are worse elsewhere.
The Pound is down by 1.16% against the New Zealand Dollar and 1.4% against the South African rand.
This is important in that it tells us losses are being felt in a number of currency classes and therefore move is purely one of GBP weakness.
There are no major headlines to attribute the sudden lurch lower which has lead to one analyst pointing the finger at automated trading programmes.
"Sterling is broadly lower for no obvious reason. There have been no data reports today. UK gilts are out-performing, meaning UK yield have fallen relatively more than elsewhere, which may be dragging on the GBP’s performance," says Shaun Osborne at Scotiabank.
"GBP/USD slide below 1.30 was reportedly driven by algo selling which managed to trigger stops below the figure," says Osborne.
Therefore, automated programmes may have pushed Sterling lower at such a pace that it cleared out a number of supportive buy orders layered, presumably around 1.30, against the Dollar.
An subsequent selling here will certainly have been felt right across the British Pound complex where similar action will have been experienced.
Looking ahead, it is important for those watching Sterling to stay calm and let the coming hours play out - it will be the daily close that will be instructive.
A deep 'down day' could suggest that we are standing at the head of another leg lower and we would certainly see a deterioration in the GBP's technical standing if these losses are maintained into the day's close.
For now though, I suspect the sell-off is unwarranted and expect the key support levels agianst the Euro and Dollar to ultimately hold.
Osborne disagrees.
Scotiabank's technical strategist says, "heavy selling last Friday was perhaps the canary in the technical coal mine for the pound, as it drove spot below the 40-day MA and clearly away from the recent peaks. A low close last Friday also formed the third leg of a longer-term bear reversal (“evening star”).
"Pressure leaves GBP/USD resting on major support at 1.2920/25, in our opinion; this is effectively the floor of the post June consolidation and the base of a broader bear wedge pattern; loss of support here would tip medium-tem risks decisively lower for the pound."
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