THE pound has risen to 103.50p sterling as foreign funds bid up the currency and bond markets.
Dealers also believe the Central Bank was in the market yesterday and is likely to be active again today, selling the pound to limit its gains against the British unit.
Sterling fell heavily against the Deutschmark despite stronger than expected economic data. The 26,000 fall in unemployment was larger than projected, with suggesting that the long expected improvement in the British economy may be under way.
Average earnings also rose higher than projected, causing concerns that inflation growth may occur later this year. Dealers are concerned that, with British elections on the horizon the authorities may not be willing to raise interest rates later in the year.
However, sterling's downside is limited. The dollar is continuing to strengthen which traditionally bids sterling up. On top of that, the prospect of lower official rates in Germany, possibly as early as today, limits sterling's trading range.
Mr John Beggs, chief economist at AIB Treasury, said he expected the pound to remain well supported at around 103.50p. "There is very good demand for Irish pounds on the back of strong buying of bonds," he said.
Irish bonds continued to outperform European markets as foreign cash enhanced the market. Traders said German funds poured at least £70 million into the currency market yesterday and British and US funds were also said to have been buyers of the currency on the back of Government gilt purchases.
The National Treasury Management Agency (NTMA) raised funds from the market for the third day running, with a £75 million issue of the 8 per cent bond due 2006. Mr Padhraig Garvey, senior economist at Riada Stockbrokers, said the issue was "snapped up". He added that the agency could do a lot more over the next week. "The only problem is it can only raise £10 million at a time. I wouldn't be surprised if they were in again today."
Foreign interest has been heightened by the meeting of EU finance ministers in Verona at the weekend. The market has now taken a view that the single currency is more likely to go ahead and that a revised ERM will be part of the mechanism. This has led to numerous "convergence trades" where dealers expect the spread between Irish and German government gilts to narrow.
The difference on five year gilts is now 1.4 points, and dealers believe this could fall to one point or even half a point.
Domestic institutions are also bidding the market up, traders said. One domestic institution was said to be in the market on Tuesday to the extent of "at least £100 million".
But analysts insist it is not just short term buying which is stimulating the Irish gilt market. "There is a huge underlying bid premium," said Mr Garvey.
Ms Joan Henry, economist at Bank of Ireland Treasury, said she expected the pound to continue edging up slowly against sterling. "Although it may drift off a little immediately with sterling remaining weak, the pound will be around 103.50p in a month," she said.
But traders expect to see the Central Bank in whenever the pound reaches these levels. "With the pound at 2.35 deutschmarks the Central Bank will be quite happy and prepared to limit the rise against sterling," one trader predicted.
