George Soros And The British Pound

george-soros

Anyone who trades forex would have heard of George Soros, the man who traded against the Bank of England and won. This story has been retold many times and is now the stuff of legend. However, in 2007, when the GBPUSD is over the 2.000 level from September 1992 once again, it is time to recall this legendary forex event. Remember September 19, Black Wednesday in 1992, the day when the Bank of England withdrew and stopped pumping money to keep the sterling pound secure.

Events leading up to Black Wednesday as it was called: BoE joined the European ERM (Exchange Rate Mechanism), the predecessor to the EURO. This is when all the currencies locked at a fixed price range with 6% leeway. If the price goes below or above this range, the Bank of England must intervene and make sure the prices stay in this range.

When it joined, the economies of the UK vs. the rest of the countries in the MRE were not in sync. The UK’s Domestic Interest Rate was too low compared to the rest of the stronger nations like Germany and France, which was much higher. This disparity was causing the fixed price range to unbuckle. With Germany enjoying a relatively healthy economy and the UK entering its economic recession, speculators saw this fixed price range in disequilibrium, seeing the pound so high compared to the Deutsche Mark while it’s inflation and interest rising, they shorted in droves.

BoE refused to lower interest rates due to inflationary fears and cannot allow the GBP to be devalued according to the ERM policy. The event leading to the yellow shaded area showed that BoE is buying the Sterling Pounds to keep it high.

However, the final blow-off came as it gets closer to the resistance area, George Soros and other speculators shorted even heavier, around $10 billion. Finally, on that day at resistance, BoE announced they will no longer be part of the ERM and will not intervene with the currency and will let it float freely.

In the following months, he and his investors made one of the biggest and rarest winnings in Wall Street history. After this event, he was the man who “broke the Bank of England.” By judging the facts, Soros was lucky that BoE caved in before his $10 billion and other speculators run out as BoE has a much deeper pocket than any one individual. Had BoE decided to continue intervening past the resistance, who knows what may have happened but certainly speculators who continue to short would have been with hefty losses.

Using fundamentals (macroeconomic views) can be advantageous in recognizing the imbalances in the currency pairs, but it must be a long term trade and with a massive account to withstand the corrections and even the wrong timing of the entries.

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