Currency market focuses on Bundesbank meeting

THE pound has remained strong against sterling, closing at 103.85p sterling in late trading yesterday. It gained slightly against the deutschmark to DM2.4007, also in late trading, benefiting from some overseas buying of Irish bonds. All eyes are now on the meeting of the Bundesbank Central Council today, which could sanction a rate cut in Germany.

A cut could ease pressure on the pound by boosting the dollar and, by extension, sterling. On the other hand, if German rates are not cut the deutschmark could strengthen sharply.

Dealers said that trading in the Dublin currency market was relatively quiet, with no sign of Central Bank intervention. The Central Bank was in the market earlier in the week, buying the pound to try to push it higher against the deutschmark. A German rate cut would be welcomed by the Irish authorities because it would be likely to, weaken the German currency.

However, the latest consumer price data from German regional states have made monetary loosening in Germany appear less likely, strengthening the deutschmark and weakening the dollar against the German currency yesterday.

That is likely to put further pressure on the dollar and sterling and, if it continues, may push the pound up further against the British currency.

If the Bundesbank does decide to reduce interest rates, most speculation surrounds a reduction in the key German money market interest rate - the so called "repo" rate. However, some analysts feel that a reduction in the Lombard rate may also be considered.

Particularly close attention will be paid to today's meeting as it is the last before the German central bank breaks for the summer.

The dollar was also influenced by Wall Street, falling when US stocks opened with a plunge and rallying when the market did the same, dealers said.

"Consumer prices in certain, German lander have led the market to fear an unpleasant surprise from the Bundesbank," said Mr Stephen Truffer, an analyst at Union Bank of Switzerland.

Among European currencies, sterling generally gained, helped, by good British retail sales figures. These made a fresh reduction in British interest rates less likely, and that supported sterling. June British retail sales rose 1.3 per cent.