A:

In Britain, Black Wednesday (September 16, 1992) is known as the day that speculators broke the pound. They didn't actually break it, but they forced the British government to pull it from the European Exchange Rate Mechanism (ERM). Joining the ERM was part of Britain's effort to help along the unification of the European economies. However, in the imperialistic style of old, she had tried to stack the deck.

Although it stood apart from European currencies, the British pound had shadowed the German mark in the period leading up to the 1990s. Unfortunately, the desire to "keep up with the Joneses" left Britain with low interest rates and high inflation. Britain entered the ERM with the express desire to keep its currency above 2.7 marks to the pound. This was fundamentally unsound because Britain's inflation rate was many times that of Germany's. (Keep reading about this in Stop Keeping Up With The Joneses - They're Broke.)

Compounding the underlying problems inherent in the pound's inclusion into the ERM was the economic strain of reunification that Germany found itself under, which put pressure on the mark as the core currency for the ERM. The drive for European unification also hit bumps during the passage of the Maastricht Treaty, which was meant to bring about the euro. Speculators began to eye the ERM and wondered how long fixed exchange rates could fight natural market forces.

Spotting the writing on the wall, Britain upped its interest rates to the teens to attract people to the pound, but speculators, George Soros among them, began heavy shorting of the currency.

The British government gave in and withdrew from the ERM as it became clear that it was losing billions trying to buoy its currency artificially. Although it was a bitter pill to swallow, the pound came back stronger because the excess interest and high inflation were forced out of the British economy following the beating. Soros pocketed $1 billion on the deal and cemented his reputation as the premier currency speculator in the world.

For more on Soros' feat against the British pound read these enlightening articles - The Greatest Currency Trades Ever Made and The Greatest Investors: George Soros.

RELATED FAQS
  1. Why the British Pound Is Stronger Than the U.S. Dollar

    Learn why the British pound is stronger than the U.S. dollar, despite the U.S. economy being larger than that of Britain ... Read Answer >>
  2. What currency is affected by the interest rate decisions of the Bank of England (BoE)? ...

    The Bank of England (BoE) is responsible for the interest rate decisions that affect the economy of Great Britain. As with ... Read Answer >>
  3. How can I trade in cross currency pairs if my forex account is denominated in U.S. ...

    The forex market allows individuals to trade on nearly all of the currencies in the world. However, most of the trading is ... Read Answer >>
  4. How often do exchange rates fluctuate?

    Exchange rates float freely against one another, which means they are in constant fluctuation. Currency valuations are determined ... Read Answer >>
Related Articles
  1. Insights

    Soros Failed to Short Pound for Brexit

    Legendary Investor George Soros Still Profited From Brexit Because of His Bearish Outlook on World Markets
  2. Trading

    This Is How 3 Investors Made a Billion Dollars

    Read about three major hedge fund managers who are worth at least $1 billion and who made large amounts of money on a single trade idea.
  3. Investing

    Soros Is Trading Again Amidst Global Concerns

    Does Soros sense new opportunities on the horizon?
  4. Financial Advisor

    George Soros Worried about China's Financial System

    George Soros is concerned about Chinese credit markets, likening China's current situation to that of the US just prior to the 2007 credit crunch.
  5. Trading

    How Forex Speculators Profited From Famous Currency Meltdowns

    Studying currency meltdowns shows traders how they can avoid big losses (or make big money) when global politics tilt the forex market.
  6. Investing

    Investing the George Soros Way

    Investing like Soros requires guts and confidence. Investors can learn much from his patience, discipline and research methods.
  7. Investing

    Soros Bet Big on Altaba Last Quarter, According to 13F

    George Soros saw a significant increase in his portfolio value this quarter, while he decreased holdings by about 57 positions.
  8. Investing

    Is It Wise to Copy George Soros's Investment Strategy?

    One of the most successful investors ever is George Soros. Does that means you should follow his investing strategy?
RELATED TERMS
  1. Floating Exchange Rate

    A country's exchange rate regime where its currency is set by ...
  2. Fixed Exchange Rate

    A country's exchange rate regime under which the government or ...
  3. Black Wednesday

    The day when the British government was forced to withdraw the ...
  4. GBP

    The abbreviation for the British pound sterling, the official ...
  5. Cable

    Slang used among forex traders referring to the exchange rate ...
  6. Adjustment

    The use of mechanisms by a central bank to influence a home currency's ...
Hot Definitions
  1. Investing

    The act of committing money or capital to an endeavor with the expectation of obtaining an additional income or profit.
  2. Stagflation

    A condition of slow economic growth and relatively high unemployment - a time of stagnation - accompanied by a rise in prices, ...
  3. Notional Value

    The total value of a leveraged position's assets. This term is commonly used in the options, futures and currency markets ...
  4. Interest Expense

    The cost incurred by an entity for borrowed funds. Interest expense is a non-operating expense shown on the income statement. ...
  5. Call Option

    An agreement that gives an investor the right (but not the obligation) to buy a stock, bond, commodity, or other instrument ...
  6. Pro-Rata

    Used to describe a proportionate allocation. A method of assigning an amount to a fraction, according to its share of the ...
Trading Center