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British pound declines suddenly, Bank of England investigates

By Ed Adamczyk
British pound declines suddenly, Bank of England investigates
The British pound suddenly declined 6.3 percent in value Friday on Asian markets before recovering. Photo by Lensicle/Wikimedia

LONDON, Oct. 7 (UPI) -- The British pound fell 6.3 percent in minutes early Friday before recovering, leaving the Bank of England searching for an explanation.

The value of the currency dropped from slightly above $1.26 to $1.18 on Hong Kong markets, just after 7 a.m. in Hong Kong, before recovering within about 4 minutes to above $1.24. It later fell on London markets but recovered to $1.24 by afternoon trading. The slide led to a 31-year low for the pound.

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Analysts are investigating the cause of the sudden decline, and although a computer-generated trade using algorithms, or "fat fingers," an error on the part of a trader, is a likely cause, the underlying reason for the fall could be speculation that Britain is approaching a "hard Brexit," economic fallout from Britain's June decision by referendum to leave the European Union. Prior to the sudden drop, the pound had already fallen 4.5 percent in value this week, after British Prime Minister Theresa May said her government would place a higher priority on controlling immigration than on accessing the European market from outside the EU.

David Bloom of HSBC Bank commented to the newspaper The Guardian, "The currency is now the de facto official opposition to the government's policies."

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"The foreign exchange market is exhibiting an uncanny resemblance to the five stages of grief. First, following the Brexit vote came the denial; theories circulated whether a second referendum would have to take place. Second was anger; claims the vote was unfair. Third was the bargaining; arguments maybe it wouldn't be that bad, what if the U.K. followed the Norwegian or Switzerland model. Now, the fourth -- a gloom is prevailing over the pound."

Bloom added he expected the pound to fall to $1.10 by the end of the year.

The sudden drop Friday also highlighted the extent to which markets are moved by computerized trading. Headlines perceived as negative can prompt momentum driving markets up or down, and when trading programs interpret information in the same manner with limited human involvement, price swings can occur quickly.

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