Who is 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. September 19th, 1992, known as Black Wednesday, was the day when the Bank of England withdrew and stopped pumping money to keep the sterling pound strong.
In 1990, BoE had joined the European ERM (Exchange Rate Mechanism), the predecessor to the EURO. The ERM worked to keep all currencies locked at a fixed price range with a 6% leeway. The Bank of England would be required to intervene if prices ever moved outside this range.
When the UK joined, its economy vs. the rest of the countries in the MRE were not in sync. Strong nations such as Germany and France had high interest rates while the UK’s Domestic Interest Rate was too low in comparison. This disparity was causing the fixed price range to unbuckle. Germany was enjoying a fairly healthy economy while the UK was entering its economic recession. Speculators saw this fixed price range in disequilibrium. The Pound was too high in comparison to the Deutsche Mark, and its inflation and interest were rising. Spurred on by Soros, speculators shorted in droves.
The Original “Big Short”
The BoE refused to lower interest rates due to inflationary fears. They simply could not afford to allow the GBP to be devalued according to the ERM policy. The final blow-off came as it moved closer to the resistance area and George Soros, with the other speculators, shorted even heavier, around $10 billion. On the day the GBP hit resistance, BoE finally announced they will no longer be part of the ERM. They would not intervene with the currency and would let it float freely. On that news, the drop in the Pound was hard and fast.
In the following months, Soros and his investors made one of the biggest and rarest wins in Wall Street history. He became known as the man who “broke the Bank of England”. Soros was lucky that BoE caved in before he, and the other speculators, ran out of capital. BoE has a much deeper pocket than any one individual so, without others following his plan and providing additional capital, Soros would be a cautionary tale rather than an historic one. Alternatively, had the BoE decided to continue intervening past the resistance, who knows what may have happened. Certainly, speculators who continue to short would have been hit with extremely heavy losses.
Using fundamentals, macroeconomic views can be advantageous in recognizing the imbalances in currency pairs. These speculations must be long-term trades with very large accounts to withstand the inevitable attempted corrections.
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