Thirty years after the Black Wednesday, when the British pound got smacked out of Europe’s exchange-rate mechanism, the chief currency strategist at RBC Capital Markets examined the currency’s performance over the last few decades.
It was 30 years ago Friday that the British pound got smacked out of Europe’s exchange-rate mechanism, George Soros became a household name, and John Major’s government was left embarrassed in an episode known as “Black Wednesday.”
Cole, in the chart below, takes a look at the pound’s performance over the last 30 years and argues that looking at exchange rates in nominal terms over such long periods “makes little sense.” “With the benefit of 30 years of hindsight, GBP was undervalued before its Black Wednesday fall, which had more to do with unsustainable domestic monetary policy than the exchange rate per se,” Cole wrote.
As they tend to do, traders sniffed out weakness, viewing the hikes as desperate measures unjustified by Britain’s underlying economic fundamentals. They put the Bank of England to the test, continuing to sell the pound and eventually forcing the government to give up the fight and return the official interest rate to 10%.
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