The pound is likely to remain under severe pressure on foreign exchange markets over the next week ahead of a crucial meeting of the Bank of England monetary policy committee and a serious of key domestic economic indicators - notably July inflation and bank borrowing figures.
After the signal last week from Chancellor of the Exchequer Gordon Brown that he did not intend any special budgetary measures to curb British economic growth, there is increasing speculation that the newly-constituted monetary policy meeting will use its independence to raise British rates by a quarter of a percentage point.
If that is the case, then it will fuel demand for sterling and indirectly send the pound higher within the exchange rate mechanism, generating additional problems for the Central Bank as the authorities try to keep the lid on domestic inflation without sending the Irish currency further to the top of the ERM grid.
Even if the Bank of England decides to take no action on interest rates this week, many in the market believe that sterling will remain in strong demand with a view that a rate rise will be announced at the monetary policy committee's September meeting.
On the domestic front, while exchequer borrowing figures tomorrow will be closely watched to see how much national debt has been reduced in the first seven months of the year, the main focus will be on Thursday's inflation and banking figures.
Analysts in Dublin expect credit growth of around 20 per cent compared to July last year, although July's figures will be distorted to some degree by the short-term lending to investors in the Norwich Union flotation.
Many Norwich Union shareholders who did not receive the share allocation they sought in the flotation will probably have since returned the unused borrowings to their banks.
Bloxham analyst Alan McQuaid expects a 20 per cent increase in credit demand, while NCB's Dermot O'Brien and Bank of Ireland's Jim Power are forecasting 19 per cent and 19.5 per cent growth respectively.
Mr Power said that it would take credit growth of over 20 per cent to cause any nervousness in the market over a rise on domestic interest rates.
"The market has pretty well discounted these kinds of numbers. I think they will be more concerned about what is happening to sterling and in that regard next Thursday's monetary policy decision in the UK will be crucial," he said.
Inflation figures for July are likely to show little sign of any overheating in the domestic economy, with forecasts from analysts ranging from 1.4 per cent to 1.6 per cent for the 11 months to July.
If the inflation and lending figures do come within that range, it will probably leave the Central Bank comfortable with the current level of interest rates.
Being forced to raise interest rates to curb inflation and bank lending is probably the last thing the Central Bank wants, knowing well that a rise in Irish rates would push the pound up towards its 15 per cent limit within the ERM.
On Friday, the pound closed 12.3 per cent above the weakest ERM currency, the French franc.
Exchequer borrowing figures on Tuesday are expected to show a surplus of between £500 million and £600 million.
Mr McQuaid of Bloxham expects the exchequer to show a continued increase in tax revenues, and believes that year-on-year tax receipts will be up over 11 per cent compared to the budget target of 5.9 per cent.
"In absolute terms this equates to a greater-than-expected tax windfall of just under £650 million," Mr McQuaid said.
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