Pound still awaits surge in demand

 

Large-scale buying of the pound has failed to materialise despite expectations that a strong demand for the currency would hit the markets following last weekend's revaluation.

The pound is in a very tight range against the deutschmark and is losing ground against sterling. It closed yesterday at DM2.5075 in late trade from DM2.5095 on Monday, which is consistent with the interest rate differential between Ireland and Germany and the new central parity in the Exchange Rate Mechanism of DM2.4833.

If the new central rate is used as the conversion rate to the euro, the pound should trade between DM2.5025 and DM2.5075 until rates fall.

It also fell back against sterling, closing at 82.05p in late trading from 82.69p as the British currency continued to surge ahead.

Economists had expected substantial buying of the pound following the revaluation.

Mr Jim Power, chief economist at Bank of Ireland, said he still thinks there is up to ú1 billion which traders need to buy before they can book their profit.

"There is no logic as to why it has not happened yet," he said. "But perhaps people are planning to do it in a controlled, gradual fashion in the run-up to May 1st when the rates will be finally set."

He added that sterling was now likely to strengthen and rise to DM3.10 over the next months. Yesterday, sterling strengthened to above DM3.05 as investors decided that rates would need to rise again following the budget on Tuesday.

Even data showing that average earnings rose by less than expected, 4.5 per cent in January, failed to halt its gains.

Economists had criticised the budget's lack of fiscal tightening and said it had done little to rein in rampant consumer demand, increasing the likelihood of another rise in interest rates from the Bank of England.

But the Chancellor of the Exchequer, Mr Gordon Brown insisted yesterday the government had tightened policy substantially and enough.

"There are no guarantees about British interest rates after the budget and the data," Mr David Coleman, chief economist at CIBC Global Markets said. "Personally, I expect no move in April and a modest risk of a rise in May."

The future of British interest rates has been hanging in the balance for some time in the face of conflicting signals from an economy on the turn.

Minutes from the Bank of England's February rate-setting meeting showed the monetary policy committee (MPC) was split four apiece on whether to raise rates. Only the casting vote of bank governor, Mr Eddie George kept them on hold at 7.25 per cent.

According to Mr Power, these expectations will not diminish sufficiently for at least three months. And if sterling does rise to DM3.1, the pound will be trading perilously close to 80p, despite the revaluation.