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I would like to know what happens to the market when the following situation arises on the GBP/USD currency pair:
-Say some big investor sells 100 million pounds but current liquidity in the market is only about 50 million for argument sake, which way will the market move to fill the big investors order?
Please explain why? Thank you
Liquidity works very similarly in currencies to how it works for equities. A large sudden order will move the price of the product and correspondingly its derivatives. In this case the value of the pound will drop against the dollar and all the related forwards/futures and options.
The main confusion with currencies however is how they are quoted. The pound is generally quoted as some number of dollars per pound. In this case for the value of the pound to drop the "price" in dollars per pound would drop as well as a pound will get you fewer dollars. Some currencies pairs are generally quoted the other direction though.
There is however tons of liquidity in major currencies and the market should be able to absorb $100MM pounds during London hours without too much issue. $500MM starts to be troublesome.
