Sterling rebounded yesterday following a larger than expected rise in British incomes in February. As a result, the pound fell back slightly, closing at 86.30p in late trade from 86.89p a day earlier.

According to Mr Jim Power, chief economist at Bank of Ireland, better than expected wages data have forced the market to reassess its view that interest rate cuts in Britain will happen by the end of the year. "They may not come until next year," he said.

The rise came despite widespread rumours that international financier Mr George Soros has been selling sterling. A spokesman for the Soros Fund in New York last night refused to comment on the speculation.

Sterling's upward surge followed reports that British wages rose by a revised 4.9 per cent in February compared to the same month last year, according to official data. Economists had expected 4.5 per cent. Some investors interpreted the strong rise as a sign of inflationary pressures that might push the Bank of England into raising interest rates.

As a result, the market seemed to ignore the bank's quarterly inflation report, making a downward revision of its forecasts of price trends and the release of the minutes of the central bank's monetary committee meeting in April confirming greater flexibility in its rate stance.

Ms Ros Lifton, senior international economist at HSBC in London, said the inflation report did not take sterling's recent decline into account or the acceleration in average earnings.

Mr Power added that the earnings data would give sterling some support and it was now likely to pivot around DM2.90.

"The market needed to pause for breath after its rapid decline, and the data gave it an excuse and do force some re-examination of interest rate prospects."

The market also failed to react to reports that Mr Soros has been betting against the pound. Dealers said he may have been in the market but they maintained that the $8 billion (£5.65 billion) stake reported in the Guardian to have been waged by him was an exaggeration.

While a bet of this scale would make sense under certain conditions, many in the market are "short" sterling and actually need to buy it back. Thus a rumour of this sort would drive down the price and work to their benefit.

And, according to Mr Power, Mr Soros no longer moves markets in the way he once did. At the same time, a Reuters poll found that the interest rate for the new euro on January 1st is widely expected to be 3.7 per cent.

The median forecast of 27 analysts was 3.7 per cent, although the most widely quoted forecast was 3.75 per cent.

This would imply almost a three percentage point cut in Irish interest rates over the rest of this year.

Most then expected rates to keep rising, finishing at 4.1 per cent at the end of 1999.