Many experienced forex traders have observed over the span of their careers in the forex market that intervention by central banks to support or weaken their currency is generally not effective in reversing market trends in the long run.

Certainly bouts of official currency intervention can create notable short term corrective bounces or even spikes that run counter trend.

Nevertheless, the underlying trend that initially prompted the intervention usually tends to subsequently reestablish itself once the central bank is eventually forced to move aside as its efforts are ultimately dwarfed by the prevailing market sentiment.

Intervention Might Smooth a Trend but Rarely Reverses One

Basically, when central banks and governments intervene in the capital markets, they are up against the forces of the free market and must abide by the rules of supply and demand, much like all forex traders.

The act of intervention in favor of one currency against another simply postpones the inevitable changes in valuation required by market forces.

This pressure most often ends with the currency that is the subject of the intervention activity resuming its previous trend after a brief corrective respite initiated by the official intervention in the market.

Professional Traders Position Themselves Against the Central Banks

Professional forex traders seasoned in calling the currency markets even use central bank intervention as an indication that the overall direction of the currency is correct.

Once such intervention is observed, they will often use that as a signal to wait to pick a spot to get into the market and trade against the central bank that is performing the intervention.

The Pound Sterling's Devaluation and Ultimate Exit From the ERM

As a well known example of such a trading strategy, take famous currency trader and Quantum hedge fund founder George Soros.

Soros took advantage of the Bank of England's ultimately futile attempts to protect the Pound Sterling's position in the European Exchange Rate Mechanism or ERM in the early 1990's.

Soros and his Quantum Fund subsequently profited substantially after Sterling devalued and the central bank was eventually forced to cease its intervention activities.

Even the BOE's move to raise U.K. interest rates sharply higher could not turn the tide and defend the Pound from intense speculative pressure led by Soros and his large fund.

This selling pressure eventually resulted in the Pound leaving the ERM, as well as considerable losses for the Bank of England to digest.

Japanese Official Intervention to Weaken Yen Also Unsuccessful

Another notable example of the lack of success of central bank intervention policy is the exceptionally poor track record of the Bank of Japan or BOJ when it comes to weakening the strength of the Japanese Yen seen during the last three decades.

In essence, each time the Bank of Japan has stepped into the currency market to sell its currency, the market in USDJPY has temporarily bounced back up, only to see further selling pressure eventually take the rate lower.

Even concerted central bank intervention involving the BOJ in addition to the U.S. Federal Reserve Bank and the European Central Bank have ultimately proven no match for the huge forex market's push to strengthen the Japanese Yen.

Risk Statement: Trading Foreign Exchange on margin carries a high level of risk and may not be suitable for all investors. The possibility exists that you could lose more than your initial deposit. The high degree of leverage can work against you as well as for you.