Anyone who trades foreign exchange (Forex) has heard of George Soros, the trader who won by betting against the Bank of England. This story has been told so often that it has become a legend. But now, in 2007, when GBPUSD is once again above the 2,000 level from September 1992, it is time to remember this famous forex event. Remember that on September 19, 1992, the Bank of England pulled out of the market and stopped pumping money into it to keep the sterling pound strong. This was known as "Black Wednesday."
Things that happened before "Black Wednesday," as it was known: BoE joined the European ERM, which was the currency group that came before the EURO. This is when the prices of all currencies were fixed within a range of 6 percent. If the price goes below or above this range, the Bank of England must step in to make sure prices stay in this range. The chart on http://www.forexplane.com makes it easier to understand what happened.
When it joined, the UK's economy was different from those of the other countries in the MRE. The UK's domestic interest rate was too low compared to stronger countries like Germany and France, where it was much higher. The fixed price range was falling apart because of this difference. Germany had a pretty healthy economy, while the UK was going into a recession. Speculators saw that this fixed price range was out of balance because the pound was so high compared to the Deutsche Mark, while inflation and interest rates were going up in the UK. So, they sold short in droves.
BoE didn't lower interest rates because they were afraid of inflation, and ERM policy says that they can't let the GBP lose value. The event that led to the yellow shaded area showed that the Bank of England was buying Sterling Pounds to keep the price high.
But the final blow-off happened when it got close to the resistance area and George Soros and other speculators sold even more shorts, totaling around $10 billion. At last, on that day of resistance, the Bank of England (BoE) said that they would no longer be a part of the ERM and would not interfere with the currency. Instead, they would let the currency float freely. On that news story, the chart at http://news.forexplane.com/Articles/GeorgeSoros/tabid/101/Default.aspx shows how much the Pound fell.
In the months that followed, he and his investors had one of Wall Street's biggest and rarest wins. He was known as the person who "broke the Bank of England" after this happened. By looking at the facts, Soros was lucky that BoE gave up before his $10 billion and the money of other speculators ran out, since BoE has a lot more money than any one person. This must be kept in mind. Who knows what would have happened if the BoE had kept intervening after the resistance, but speculators who kept selling short would have lost a lot of money.
Fundamentals (macroeconomic views) can help you spot imbalances in currency pairs, but you need a very big account and to trade for a long time to be able to handle corrections and even the wrong timing of your trades.
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