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The pound fell to all-time lows against the US dollar in the early hours of trade during the Asian session on thin liquidity, which created a flash crash as investors weren't receptive to the UK's planned tax cuts from their mini-budget. The last time cable was this low was in 1985. The British pound was already facing negative sentiment from traders/investors on Friday after the UK's new chancellor Kwasi Kwarteng announced his new mini-budget that could widen the fiscal deficit. This news, in addition to a surging US dollar which drove the dollar index (DXY) to 114.5, was the catalyst for the major flash crash. CME Group had to halt GBP futures due to extreme market volatility.
Flash crashes are abnormal movements in the market where there is heavy selling of securities by high-frequency trading firms/systems. Computer algorithms automatically react to certain conditions and begin selling significant volumes of securities at a rapid pace to mitigate risk & trading losses. Major exchanges have backup systems called circuit breakers which halt trading to avoid further losses and switch off once the price gains stability and trading can resume normally. This is what we saw with the CME group.
You may recall the last time this happened with cable was in 2020, and more famously, BREXIT.
Generally, in these situations, traders/investors tend to avoid trading or opening positions as:
The US dollar is expected to continue its run for greater strength primarily due to higher interest rate differentials between the two economies. This, in addition to the macroeconomic backdrop for England, especially around its current recessionary theme, slow growth & high inflation rate, will further widen the gap, causing significant and continued weakness in the currency pair. There are calls for the Bank of England (BOE) to intervene with a potential intra-meeting move to minimise the risk and gap between the two currencies, providing a very hawkish stance to combat both rapid inflation, interest rates and the currency gap. This will hopefully bring some form of confidence to the economy. We already saw EURUSD fall below parity, so could we see cable do the same by the end of this year? Make sure you watch this space, folks!
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Need 4 Speed - ASX Report - 26/09/22
Check out the daily edition of our pre-market ASX report covering the past, present and future of Aussie macro outlook and equities.
Chart Analysis - Week Ahead 26 September 2022
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Need 4 Speed - ASX Report - 26/09/22
Check out the daily edition of our pre-market ASX report covering the past, present and future of Aussie macro outlook and equities.
APAC Week Ahead: Higher for longer
US GDP & PCE, China manufacturing PMI, Japan Industrial Output, AU retail Sales, CA & UK GDP
Inflation fears rout sterling, bonds, and equity markets
European markets have ended the week sharply lower as a bond market rout upended sentiment, sending the Euro Stoxx 50 and the DAX to their lowest levels this year,
Upcoming indices dividend drop points
View the estimated indices dividend drop points* for the week commencing 26 September 2022.
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