Odds of GBP/USD Rate Close Below 1.20 Slashed at Betway, Flash Crash Sell-Off Likely to See Further Cuts

Just hours before Pound Sterling's infamous flash crash against the Dollar bookmakers Betway cut odds on Sterling falling below 1.20 against the Dollar.

On Thursday afternoon Betway announced odds had now gone 6/4 from 3/1 for the Pound to drop below the $1.20 mark.

Within a few hours Sterling had done just that - crashing to a low of 1.18 in early Asian trade.

The target has therefore been hit for a number of punters, but the nature of the crash in Sterling to below 1.20 is problematic as 'flash crashes' tend to be blips created by the mistake of an individual trader or algorithmic trading systems.

“Apparently it was a rogue algorithm that triggered the sell off after it picked up comments made by the French President Francois Hollande, who said if Theresa May and co. want hard Brexit, they will get hard Brexit," says Kathleen Brooks at City Index in London.

“These days some algos trade on the back of news sites, and even what is trending on social media sites such as Twitter, so a deluge of negative Brexit headlines could have led to an algo taking that as a major sell signal for GBP. Once the pound started moving lower then more technical algos could have followed suit, compounding the short, sharp, selling pressure," says Brooks.

It will take some time to unravel the exacty cause of this particular crash.

“Bets on how low the pound will sink in 2016 will be settled at the end of the year. Unless the pound sinks below the dollar before then!" says Betway's Alan Alger.

“With just under 3 months to go until the end of 2016, there’s likely to be plenty of twists and turns. Don’t count your winnings just yet,” says Alger.

However, there are now concerns that the sell-off may be overdone.

"The net-short speculative positions in sterling on the futures market are massive. At some point in time these investors will take profit on their  sterling shorts, probably at a time when sterling fails to weaken further. If we take purchasing power parity into account, sterling is substantially undervalued," says Georgette Boele at ABN Amro.

Pound bearishness shifted into a higher gear this week after the U.K. government weighed in on Brexit and signaled that access to Britain’s largest trading partner, the EU, would take a back seat to its higher priority of controlling immigration.

More latitude on immigration but less leeway on trade is seen as a more economically harmful route, dubbed a so-called ‘hard Brexit.’

With Brexit uncertainty in the driver’s seat for Sterling, it failed to enjoy much meaningful support for solid U.K. data this week on manufacturing and services growth.

"With bearish sentiment on the rise, the pound would be at risk of an accelerated slide should U.S. jobs data Friday reveal a ripening case for a Fed rate hike in the months ahead," says Joe Manimbo, analyst with Western Union.

We reported on Tuesday that odds on GBP/USD slipping below 1.20 had been cut to 3/1 by bookies Betway.

Latest Pound / US Dollar Exchange Rates

	Live: 1.3323▼ -0.02% 12 Month Best: 1.3789
*Your Bank's Retail Rate	1.287 - 1.2924
**Independent Specialist	1.3137 - 1.319 Find out why this is a better rate

* Bank rates according to latest IMTI data.

** RationalFX dealing desk quotation.

 

Scotiabank See Low at 1.25

GBP has dropped to a fresh multi-decade low with a technically-driven break through the July low around 1.28, pressured by sentiment and Brexit-related concerns.

"The U.K.-U.S. 2Y yield spread is at historical lows, pushing beyond -70bpts, and measures of implied GBP volatility are inching higher, generating a rise in the premium for protection against GBP weakness. We look to further GBP weakness toward 1.25," says Eric Theoret at Scotiabank.

GBP/USD short-term technicals remain bearish argues Theoret according to momentum signals and the RSI is only just approaching the oversold threshold at 30.

With Sterling not being oversold the prospect of a near-term bounce remains slim.

DMI’s are providing confirmation and MA’s are bearishly aligned across a range of time horizons.

"There are no major/significant technical levels ahead of the February 1985 low at 1.0520," says Theoret.

Also seeing further weakness is Societe Generale's Kit Juckes who tells clients:

“Sterling will get support from the economic data only if their resilience lasts long enough to challenge the view that rates will be cut again due course. The better recent data clearly reduce the chances of a near-term cut, but that doesn't matter so much as what happens over the next year or so.

What this means for the exchange rate is that it will probably continue tumbling well into the 1.20s.

“If I extrapolate the correlation between GBP/USD and rates, GBP/USD 1.25 is reached if the market prices a 12-month forward rate differential of 1%,” says Juckes.