'Flash Crash' Sinks the Euro Against Pound Sterling on Exchange Rate Markets

We are witnessing incredibly volatile times on the foreign exchange markets at the present time - latest action has seen the euro slump as concerns over the Eurozone economy heat up once more.

The FTSE 100 plummeted a whopping 2 pct on Thursday before recovering all the losses showing just how volatile markets have become.

Initially we saw the euro rise against the pound sterling (GBP) on the back of this move which was odd as the source of the selling pressure lay with the Eurozone economy.

I had speculated that this could indeed be signs that the Euro could be a safe-haven. Either way the resilience in the EUR looked suspicious.

HOWEVER - the euro was then suddenly sold off in something resembling a 'flash crash'- some big traders finally yielded and sold the euro against the pound and dollar. At the weekend we see the GBP has held onto recent gains:

• The pound to euro exchange rate is 0.00 pct higher at 1.2606.
• The euro to dollar exchange rate has fallen 0.00 pct lower to hit 1.2764.

Note - these spot market quotes are subject to a discretionary spread-charge by your bank. An independent FX provider will however seek to under-cut your bank's offer, thereby delivering up to 5% more FX. Find out how.

Why is the euro weaker?

The euro had looked suspiciously resilient in the face of signs that things are falling apart in the Eurozone.

Greek yields are tapping new highs which shows that the periphery is coming under intense scrutiny once again.

Other peripheral nations are starting to feel the heat - Spain, Italy, Ireland and Portugal are seeing their bonds tank in a clear indication that the current headache is Eurozone related.

It seems that some big players in the market were no longer willing to expose themselves to such risk and have hammered the currency.

Now we are seeing a squeeze - stop-losses are being taken out and punishing those that thought it would be a good idea to bet against the British pound in anticipation of delayed interest rate rises.

Don't Write the Euro Off Just Yet

While the euro is under pressure, Lloyds Bank Research tell us that it is not all doom and gloom for the shared currency:

"It remains hard to be positive about the EUR given the fragility of the Eurozone economy and the consequent greater risks to the region from any loss in confidence.

"However, positioning remains short EUR and the loss of confidence elsewhere has moved yield spreads in the EUR’s favour for now, so if uncertainty about the FOMC undermines enthusiasm for the USD but supports risks appetite for now, the EUR should hold its own.

"It will also be interesting to hear the tone from ECB speakers today.

"Much of the current recent weakness in risk assets appears related to concerns about Eurozone growth which have been encouraged by the gloominess of commentary from the ECB.

"While the data has been disappointing, it isn’t at this stage indicating a return to recession, but a loss of confidence could trigger more severe weakness. The ECB priority may consequently now shift from emphasising weakness in order to pressurise governments to act and weaken the EUR to playing down weakness in order to protect confidence."