Sterling, or rather ‘the British bulldog’, was on a tear yesterday having broken and accelerated through some key psychological trading levels against both the US dollar and euro. Having fallen to as low as €1.1078 on election night, an unexpected U-turn in market sentiment means the GBP/EUR rate has snapped back and surged by over 5.2 per cent in just two days.

In quite an astounding rebound, GBP/EUR is now trading at six-week highs and is attempting to reopen the 1.16-1.18 price range. This ‘Bulldog rally’ is an accumulation of several important domestic and global factors this month, and not just on the back of the surprisingly moderate tone Donald Trump has adopted since Wednesday which has boosted market sentiment.

EUR

The pound’s rally and in particular the sharp rise in the GBP/EUR rate is also down to the way the euro now behaves as a currency. The euro now tends to perform like the Japanese yen in that during periods of negative risk adverse trading sentiment the Euro tends to gain on an unwinding of risky carry trades. For example, during the crashes in China’s stock market over the past one-and-a-half years, the euro was a big beneficiary during that period.

However, when markets are in a more positive risk-on mood, the euro loses ground as it is sold in favour of higher yielding currencies. Furthermore, the euro also faces an event risk issue of an Italian referendum on December 04 while Brexit and Trump’s victory may now empower the Frexit movement ahead of the French elections next year.

USD

Overnight, central banks in Indonesia and Malaysia have either intervened or are considering action to stop their domestic currencies from a sharp devaluation against the US dollar. Reuters reported that Indonesia’s deputy governor said the central bank was present in forex markets. The Indonesian rupee tanked as the US dollar rallies against emerging market currencies, including the Mexican peso and Turkish lira. Separately, the EUR/USD rate has also fallen by 3.7per cent since Wednesday’s open.

Trump’s victory in the US election has caused an unexpected reaction in financial markets given his more moderate tone so far and comments about comprehensive infrastructure spending which may boost US GDP. For now, it seems markets are focusing more on Trump’s proposals to boost spending which may then trigger a sharper rise in inflation. Consequently, market expectations of a December 14 US interest rate hike has risen to 72 per cent, having dropped initially after Trump’s shock election win.