LONDON (AFX) - Sterling arrested its slide in early trade as fears about the prospect of the re-elected UK government's euro entry intentions receded, dealers said.
They noted reported comments by a treasury official aimed at reassuring the markets that the government is not "going to act hastily" over a euro referendum.
"People are still pretty confused about the prospects for euro entry, and the press wasn't encouraging enough on that score to prompt a further bout of selling this morning," Halifax economist Steven Pearson said.
"If anything, sterling blipped up in overnight trade as people thought it looked a bit oversold. Unless we're going into the euro in the very short term, sterling isn't likely to collapse from these levels," he said.
However, Pearson warned that the treasury's move to reassure the markets is not a signal that the government will not take sterling into the euro.
WestLB economists interpreted prime minister Tony Blair's cabinet reshuffle as "a step to prepare the UK" for a referendum on joining economic and monetary union in the second half of the year.
"However, given the vast uncertainties, we expect the market to take a more cautious view this week and eur/stg should lack a clear trend with risks to the downside," they said in a research note.
Dealers noted the lack of impact on the euro of Ireland's rejection of EU enlargement plans set out in last December's treaty of Nice. "The argument that the Irish rejection will delay the EU enlargement and therefore supports the euro is little valid in our view, given that even an Irish no vote in a second referendum would hardly derail EU enlargement," WestLB economists said.
Noting the euro's lack of response to the formation of the controversial new centre-right government in Italy, Pearson said the market appeared tired of pushing the single currency lower at the moment.
Otherwise, the yen remained weak against other major currencies after the unexpectedly sharp fall in Japan's first quarter gross domestic product figures.
"People are now speculating that Japan's going to be in a technical recession over the first half of this year," Pearson said.