Black Wednesday 1992: When a Currency Peg Gave Way
Posted: Tue Oct 27, 2026 4:02 am
In the early 1990s, sterling was a member of the European Exchange Rate Mechanism, which required it to trade within a defined band against the Deutsche mark. The arrangement became uncomfortable after German reunification, when relatively high German interest rates pulled the whole system in a direction that suited the British economy poorly.
On 16 September 1992, selling pressure on sterling intensified. The Bank of England purchased pounds in large volume and announced sharp interest rate increases during the day, yet the pressure persisted. By the evening the United Kingdom had suspended its ERM membership, and sterling floated downward. Italy's lira left the mechanism around the same time.
The story is often told as a tale of a single famous trader, but the underlying mechanics were broader. A peg is a promise, and its credibility depends on the willingness and ability of the authority to defend it, including the domestic cost of doing so.
Scalpers can draw a modest lesson from this. Exchange rates held artificially calm tend to hide stored-up pressure. When such a regime ends, the move is typically one-directional and fast, with little opportunity for orderly entries or exits.
On 16 September 1992, selling pressure on sterling intensified. The Bank of England purchased pounds in large volume and announced sharp interest rate increases during the day, yet the pressure persisted. By the evening the United Kingdom had suspended its ERM membership, and sterling floated downward. Italy's lira left the mechanism around the same time.
The story is often told as a tale of a single famous trader, but the underlying mechanics were broader. A peg is a promise, and its credibility depends on the willingness and ability of the authority to defend it, including the domestic cost of doing so.
Scalpers can draw a modest lesson from this. Exchange rates held artificially calm tend to hide stored-up pressure. When such a regime ends, the move is typically one-directional and fast, with little opportunity for orderly entries or exits.