The Bank of England is probing a “flash crash” which sent the value of the pound plunging by as much as 10 per cent per cent amid speculation that a computer programme may have been to blame.
The value of sterling against the US dollar hit fresh 31-year lows of $1.18 early yesterday morning before recovering some of the lost ground. The Bank of England said it is “looking into the cause of the sharp fall”.
According to the RAC, the crash could see petrol and diesel pump prices go up by around 3p per litre in the next fortnight as imports become dearer.
Experts blamed the sudden fall on factors including comments by French president Francois Hollande, who insisted the European Union must take a tough stance in negotiating Brexit. But a “rogue algorithm” on currency trading markets is also thought to be responsible.
Algorithmic trading involves programming computers to follow a set pattern of instructions when placing trades at lightning fast speeds, quicker than any human trader could, in a bid to maximise profits.
Kathleen Brooks, research director at spreadbetting firm City Index, said: “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.”
Some of the automatic programmes trade on the back of news sites, and what is trending on social media sites such as Twitter.
“A deluge of negative Brexit headlines could have led to an algorithm taking that as a major sell signal for the pound,” said Brooks.
Once the pound started moving lower, a domino effect among other trading computers could started which pushed prices lower quickly.
Traders have been increasingly alarmed since the Conservative Party conference began last weekend, with the prime minister giving her clearest indication yet that Britain is hurtling towards a so-called “hard Brexit”.
A prolonged fall in the value of the pound, which the country is seeing, will affect import costs and ultimately consumer prices.
The RAC’s spokesman Simon Williams said: “The unexpectedly sharp fall in the value of the pound will make the wholesale price of fuel go up.
“Sadly, it’s also happened at a time when the oil price appears to be rising again so the combined effect will be bad news for motorists.”
After oil producing group Opec reached a deal last week to stabilise the market by slashing output, the cost of a barrel has gone up by $6.
British tourists will also see their spending power dramatically reduced. Not only has the pound collapsed against the dollar, but it has also plunged against the euro – with experts warning that it could reach parity by next year. But tourists coming to Britain will have more pounds in their pockets to spend.