Pound expected to experience renewed pressure this week

The pound is expected to come under renewed selling pressure this week, following the Government's failure at the weekend to give any signal to the markets designed to support the currency's value.

Economists are forecasting that the pound, which rallied slightly on Friday, to close at DM2.4940, could drop to DM2.44 this week. "If the authorities continue their silence on the matter then the pound will decline further," Mr Dermot O'Brien, chief economist at NCB Stockbrokers, said last night.

The pound closed at 84.9p against sterling in late trade on Friday, from 84.53p, and at DM2.4940 from DM2.4812. It is now just 2 per cent above its central ERM rate against the German currency.

There had been some rumours in the market on Friday that the Government might signal over the weekend that it favoured a revaluation of the currency's central rate in the ERM to allow it to join monetary union at a stronger rate. However, late last week official sources strongly played down suggestions of any early move to do so.

In its weekly market comment, AIB Corporate & Commercial Treasury said that although the rumours regarding revaluation were completely unfounded, continued lack of clarification on the authorities position could result in further selling of the pound this week.

"While Irish-German interest rate differentials and profit-taking may provide some support, the trend will continue to be downward as EMU approaches," AIB said.

It added that with the dollar and sterling remaining firm, the pound will continue to be vulnerable against both currencies. Mr O'Brien said he had been a bit surprised that there had been no move to revalue the pound's central ERM rate. "Our perception was that the authorities were not keen to let the pound slip to DM2.41 at this stage."

Mr O'Brien warned that the continued weakness of the pound will lead to inflationary pressures by pushing up import prices.

He forecast that inflation could rise to over 3 per cent by the end of the year.

He pointed out that this would put upward pressure on wages and would bring strong pressure to bear on the Partnership 2000 deal, which allows for very modest wage increases.

"The market has been looking for a signal and it hasn't got one and so it has been acting in an information vacuum," he said.

Meanwhile, Fine Gael spokesman on Finance, Mr Michael Noonan, has accused Finance Minister Mr McCreevy of "gross negligence" for not making a policy statement on the rate at which he intends to bring the pound into EMU.

"If he continues to remain silent, the markets will take this as an indication that he intends locking the pound into EMU at DM2.41 and the pound will be traded down to this level," he said in a statement.

"This in effect, will be a devaluation on its pre-Christmas value of almost 8 per cent."

Mr Noonan added that the Minister's so-called "button lip policy" is no longer sustainable. "He must make a policy statement to explain his position," he said.