'Flash crash' hits sterling which falls to 31-year low against US dollar
Sterling endured a torrid day on the currency markets after an overnight "flash crash" triggered by a suspected "rogue algorithm" sent it plummeting to a fresh 31-year low against the US dollar.
The value of the pound dived during Asian trading session to 1.18 US dollars, before mounting a lacklustre recovery to trade 1.6% lower at 1.241 US dollars - well below levels of 1.26 recorded before the fall.
The UK currency also failed to mount a full recovery against the euro, down 1.7% at a five-year low of 1.113 euro.
Sterling had come under sustained pressure during the week after investors became increasingly alarmed that Prime Minister Theresa May was opting for a so-called "hard Brexit", whereby Britain would leave the European single market so the Government could tighten its grip on immigration.
However, market-watchers said the "flash crash" was probably caused by an algorithm reacting to a news story stating that French president François Hollande was taking a tough stance on Brexit negotiations .
The Bank of England said it was looking into the cause of the "flash crash", while some analysts warned that the pound was now on course to reach parity with the euro.
In a follow-up statement, the Bank said governor Mark Carney had asked the BIS markets committee to investigate the events surrounding the flash crash.
It added: "With input from the Bank, the committee will review the lessons from this, and other recent episodes of flash events in FX markets at its next meeting."
Such has been the severity of the currency fall in recent days that it forced retailer Sports Direct to issue a profit warning on Friday.
It said the "extreme movements" in the pound would cause full year earnings to hit £285 million, compared with the £300 million it had originally pencilled in.
Kathleen Brooks, research director at spreadbetter 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.
"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."
The "flash crash" capped a tumultuous week for the pound, which saw it drop more than 4% against the US dollar since Friday September 30.
The UK currency plumbed new depths on Thursday after German chancellor Angela Merkel took a tough stance on Brexit, saying Britain would not get access to the European single market if it did not accept free movement of people.
Any hopes that an economic update from the manufacturing sector on Friday would provide some relief for sterling were quickly dashed.
Output could only muster a slight rebound to 0.2% in August, while industrial production posted a worse-than-expected fall of 0.4% over the period.
Connor Campbell, financial analyst at Spreadex, said: "If the pound was a prize fighter, the referee would have already rung the bell, the currency bloodied and bruised beyond belief."
He said that the pound seemed to recreate Thursday night's "flash crash" in slow motion on Friday, as it remained heavily down against the euro and the dollar.
In contrast, sterling's slide has dished out a hefty boost to the FTSE 100 Index in recent sessions, with the London market coming within a whisker of recording an all-time high on Tuesday.
Foreign companies listed in London have seen their shares rocket amid the pound's tumble as it boosts their earnings when they are translated back into sterling.
The FTSE 100 Index closed up 0.6% to 7044.39 on Friday.