Last Friday the British Pound dropped to $1.1378 to the Dollar. The drop in the currency sent shock waves throughout the world. Despite the slight recovery on the day, the Pound did not recover from the initial hit. Today the Pound is trading at $1.24 to the Dollar

Throughout the day commentators were trying to explain why the Pound had dropped so quickly.

While many questions were asked, one question was omitted. What if the pound drops below the Dollar?

Since the UK voted to leave the EU, the British economy has had two converse things happen. On one side, the FTSE 100 has raised past 7000 on at least two occasions indicating that businesses on that index are gaining support and money.

On the other side, we have the massive drop in the value of the Pound since the referendum vote. The exchange rate dropped from $1.48 to $1.31 in less than a minute. From that point the pound has held steady at 31 year lows but, after the Conservative party conference, the Pound started to drop again. From around $1.31 to £1.27 then, on Thursday night, the massive, brief drop. Now the pound is trading at $1.24.

While commentators were linking this situation to the far-right rhetoric of the previous week, a new idea came into my head.

For a long time the pound was assumed to be an overvalued currency and at every major economic event in the past ten years, the Pound dropped severely every time.

There is a reason that I’ve chosen the past ten years. The Pound has experienced drops in its price before and subsequent gains but, over the past ten years, the Pound has not recovered ground lost as illustrated by this chart.

Further, the Pound has dropped, without regaining any momentum, back to the $2.00 pre-recession levels. With the UK leaving the EU, without a coherent plan, the only serious outcome to negotiations has to be a “hard Brexit”. None of this creates an environment where the Pound trades higher than the Dollar in the foreseeable future.

There has been much talk of the Pound and Euro reaching parity. Some think it could happen as soon as this year but the drop and the speed of the drop should start to engage the brains of the world’s foreign exchange markets.

If the Pound can drop ten percent in a minute then it has to be assumed that there is a serious risk of the Pound going lower than that over the next two years . Any negative news sends the Pound tumbling down. Remember, the UK Government has to negotiate new trade deals with the rest of the world including: the US, China and the EU. Global markets will be looking closely at these trade deals to see what the UK gets.

With the market being so risk averse, it is possible that an announcement on the UK leaving the single market could take the Pound below the Dollar.

At this stage, I don't think that anyone is seriously thinking about this possibility but I am seeing similarities between this and other financial events. Anything is possible in the world of finance. Nothing is secure as Northern Rock and Lehman Brothers found out.

Also, like serious financial events of the past commentators are trying to explain away the warning signs with a number of excuses. Such as human or mechanical error.

I don’t think people will ask these questions because they don’t want to know the answer. The British Pound has been a stalwart of foreign exchange for centuries. The very name rings with stability. It is the backbone of the City of London and the tens of thousands of jobs in the square mile.

Should that stability be rocked, how quickly do you think the world will move on?