Black Wednesday Explained
Black Wednesday refers to 16 September 1992, one of the most dramatic events in modern financial history, when the British pound collapsed and the United Kingdom was forced to withdraw from the European Exchange Rate Mechanism (ERM). This single day reshaped UK monetary policy and became legendary in forex trading history.
At the time, the UK had committed to keeping the pound within a fixed range against other European currencies, especially the German Deutsche Mark. However, Britain’s economy was weak, inflation was high, and interest rates were too low to support the pound at its set level. Many traders believed the currency was overvalued and impossible to defend.
As pressure mounted, the Bank of England spent billions of pounds from its foreign reserves and sharply raised interest rates to protect the currency. Despite these efforts, heavy selling continued. Hedge funds, most famously led by George Soros, aggressively shorted the pound, betting on its collapse.
By the end of the day, the UK government admitted defeat and withdrew from the ERM. The pound was devalued, interest rates later fell, and Britain regained control over its monetary policy.
Black Wednesday proved that markets can overpower governments and highlighted the risks of fixed exchange rate systems. It remains one of the most important lessons in forex history.
