Anyone who has extensive experience trading in the forex market will undoubtedly be quite familiar with at least some instance of central bank intervention to either prop up or devalue its nation’s currency.

Nevertheless, not everyone is aware that the act of intervention taken on by a nation’s central bank has historically proven to make very little difference in the actual long term valuation of the currency. In fact, intervention often winds up costing the central bank in the long run.

*Intervention May Provide Only Short Term Relief*

Although central banks conduct forex trading operations in order to alter the direction of the exchange rate of their currency, often these measures simply provide a quick fix and result in only a temporary solution.

Of course, official currency intervention may often create short term corrective movements in the affected currency in the desired direction. Nevertheless, if the larger scale demand or supply for the currency continues to run counter to the direction of intervention, it is usually only a matter of time for the prevailing market trend that reflects what really drives exchange rates to resume.

The reason for this consists of the fact that central banks must deal with the forces of the market where the laws of supply and demand prevail. Intervening on behalf or against another currency will only postpone, but will probably not reverse, the prevailing market trend.

The end result often has the currency which is the subject of the intervention simply resuming its original trajectory after traders are satisfied that the official intervention has concluded.

Generally, the currency will trade on a counter trend for a period of time after the official intervention, but will often not even break its prevailing trend lines.

*Central Banks Versus Forex Traders*

Many professional forex traders, and even some retail traders who deal through forex brokers will take on the central bank and look to position themselves in opposition to the bank’s official action.

Often, the fact that a central bank is intervening tends to confirm the original direction of the currency to a professional dealer. Such activity, especially when the bank is not accompanied by other central banks, can actually be seen as having something of a smoothing effect on exchange rates in an attempt to avoid excessive market movements in any one direction.

Upon seeing intervention, such traders will usually then wait for the currency to reach a certain peak correction level during intervention where they can then relatively safely position themselves contrary to the central bank’s action.

Sometimes more than one central bank will intervene in the forex market in a particular currency pair, and this is known as concerted intervention. Professional traders often take this form of intervention more seriously since it involves the agreement among more than one central bank that current exchange rate levels are inappropriate for some reason.

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George Soros and the Pound Sterling Devaluation*

Perhaps the most famous case of a maverick trader going head to head against a major central bank involves the Pound Sterling, the Bank of England and George Soros’ Quantum Fund .
In the early 1990s, the British Pound was the target of speculation that it was ripe for devaluation, and the Bank of England stepped into the markets in an attempt to defend the currency’s level within the European Exchange Rate Mechanism or ERM.

Through official and formally announced forex market intervention, the BOE tried to prop up the Pound. Nevertheless, this action was countered by Soros’ Quantum Fund continuing to sell more and more Pounds.

Despite even raising interest rates substantially in defense of the Pound and throwing a large amount of money at the situation, the BOE eventually famously admitted defeat in stemming the decline of the Pound. The British central bank finally gave in to market pressure and Sterling was forced to exit the ERM.

The BOE sustained heavy financial losses in this crisis, while the Quantum Fund’s huge profits helped make George Soros a billionaire.