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The Euro
Black Wednesday - 16th September 1992
Coming up to Black Wednesday the foreign exchange market had believed that sterling would have to be devalued as it had been consistently close to its lower limit and very weak. They had therefore been selling intensively.
On Black Wednesday the selling pressure intensified considerably and during the course of the day interest rates were raised twice; the first time from 10% to 12% and the second from 12% to 15% (with effect from the next morning).
The government also tried to support the exchange rate by buying sterling and selling foreign exchange. However, the markets saw the increases in interest rates as a weakness by the government and carried on selling. This increased selling shifted the supply curve for sterling to the right (as shown in the diagram below) and put further downward pressure on the exchange rate. In the
end the government bowed to the pressure and had to pull out of the ERM.
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