Pound crashes to 31-year low in two-minute ‘flash crash’ – So what caused it?

The British Pound caused a market chaos when it collapsed in value early this morning to a new 31-year low.

The sterling officially fell 6% against the dollar in two minutes to a value of $1.1841.

However Reuters reports the currency falling as low as $1.1378, which has not been confirmed by official markets because they were closed to avoid triggering a wide sell-off.

This drop in value has been described as a ‘flash crash’ because of how quickly it happened and how steadily the pound recovered.

Analysts have tried to explain the crash with several theories. One of them is the “fat finger” error, whereby a human mistake on the input can trigger other automated sales, which then further magnifies the drop.

The other possibility blames politicians. Theresa May has been hinting at a “hard Brexit” this week which is expected to destabilize markets and create uncertainty.

Furthermore, just before the drop, the French Prime Minister François Hollande said the UK would have to “suffer” for its decision to leave the EU, which is a change of tone from his usual softer position on the future negotiation.

The value of the pound against the dollar is now trading at around $1.24, which is a recovery to previous values. However, this is not the first time a ‘flash crash’ as shook markets.

In October 2014, the Japanese stock market were shaken by a mistaken input which saw £380bn in share orders being made then cancelled, which affected 42 companies.

In May 2010, a British trader allegedly caused billions to be lost in value from some of the world’s biggest companies. Navader Singh Sarao faced charges of market manipulating, which consists of offering to buy stocks with intent to cancel the trade before executing it. This causes the market to shift if it is done in high volumes and it is possible to profit from them.