Cable Crashes Overnight Amidst Thin Liquidity As Brexit Fears Weigh

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GBPUSD Down 6% Overnight

Currency markets were rocked overnight as Sterling plunged over 6% during Asian session trading. The moves come on the back of sustained weakness this week driven by the UK PM’s confirmation of Brexit, with Article 5 to be officially triggered by the end of March 2017 at the latest. Widespread investor uncertainty has seen heavy selling in Sterling over the week despite positive data prints as markets once again fear for the future of the UK economy which seems on course for a hard Brexit.

GBPUSDWeekly

Fat Finger Or Algo Error?

The reason for the move the sell-off, which took GBP to fresh 31 year lows against the US Dollar is not entirely clear. Some analysts suspect a “fat finger”  error triggered a wave of stop-loss orders in the market whilst others point to electronic trading systems with the sell-off thought to be the latest example of a “flash crash.”  Despite the extent of the decline Sterling managed to quickly recover as sellers disappeared taking price back up to around the 1.24 mark.

French PM Takes Tough Stance On Brexit

In terms of possible drivers for the initial supply, analysts point to comments by French President Francois Hollande who took a hard stance on Britain saying that “there has to be a price to pay or else the negotiations won’t go well” adding that “The UK decided to go for Brexit. In fact, I believe a hard Brexit…We have to follow through with Britain’s wishes to leave the European Union, and we have to be firm… If not, we will put into question the EU’s principles.”

Many analysts were anticipating that the UK could avoid a Hard Brexit and were caught off guard by the sudden announcement this week of the triggering of Article 50. Comments made by UK PM May over the weekend suggest an emphasis on controlling immigration and limiting freedom of movement over access to the single market which is forecast to negatively impact the UK economy.

Bearish Positioning Builds

Despite being at record levels, Bearish sentiment continues to build over Sterling with the latest CFTC positioning data showing a wave of sellers having stepped back into the market.

EURGBP has moved to levels not seen since 2009 whilst GBPJPY is at 2012 levels.  The magnitude of the moves overnight shines a further light in liquidity conditions in FX markets which have been rapidly deteriorating in recent years.

EURGBPWeekly

Whilst GBP has stabilized this morning in the wake of the moves flows are reported to be still in favour of GBP selling with Hedge Funds noted to be fading the move back into 1.25. With a raft of key technical support having been blown through in GBPUSD

Looking Ahead

As markets remain muted after the extreme moves overnight, attention now turns to the US employment reports for September due later today. These reports mark the first labour market readings since the September FOMC which saw the Fed choosing to remain on hold awaiting evidence of further progress towards its goals and further strengthening of the labour market. Consensus forecasts were looking for 172k on the month vs. 151k last month whilst the Unemployment rate is expected to remain steady at 4.9%.

united-states-non-farm-payrolls

US rate hike expectations and subsequently the US Dollar have taken a step higher this week fuelled by positive prints in both ISM Manufacturing and Non-Manufacturing readings which printed 51.5 vs. 50.4 and 57.1 vs. 53 respectively. Many analysts expecting that strong readings for the employment component of these surveys suggest a positive NFP print today.

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