LONDON (AFX) - Sterling was weak in early trade, but off yesterday's 15-year lows, on the view that the UK government will mount a vigorous campaign to take the currency into the euro after its near-certain election win today, dealers said.
"People are upgrading the probability attached to euro entry and that's manifesting itself in sterling's fall yesterday," Halifax economist Steven Pearson said.
"Nobody believes we're going to go into the euro at current levels of around of 0.61 stg. A more realistic rate would be 0.70 stg," he said.
Royal Bank of Scotland economist Adrian Schmidt said sterling will remain weak today "as ahead of the election, nothing is likely to change market perceptions".
In a research note, he said however that the government may not call its promised referendum on euro entry in the next parliamentary term or it may not hold the poll at all.
"This suggests that eur/sgt gains are likely to be reversed when it becomes clear that the UK will not be voting to enter EMU. We suspect this will be clear by early next year, but it could be earlier," he said.
Dealers said this morning's UK industrial production release is unlikely to have a bearing on sterling.
Industrial output is expected to have fallen 0.1 pct in April from March and to have dipped 0.9 pct year-on-year, according to the median of 18 analysts' forecasts compiled by AFX News. This compares with a 0.2 pct fall on the month which left it down 0.1 pct on the year.
Dealers said yesterday's widely expected decision by the Bank of England to keep rates on hold had no impact on sterling.
The euro too is weak, with market participants awaiting today's rate decision by the much-maligned European Central Bank. Dealers said the ECB, widely criticised for its failure to communicate clearly, is not expected to cut rates further, but they were loath to rule anything out.
"We're cautiously saying no change, but obviously we're very wary," Pearson said.
"If you take the ECB's comments at face value, they're not likely to. If you look at inflation, they're not likely to. But you could make a case for a cut on growth grounds, so my view of it is perhaps not today but next month," he said.
Schmidt agreed: "Even though the ECB targets inflation, not growth, weaker growth expectations will reduce inflation expectations boing out, and justify easier rates.
"We consequently expect another cut before the summer break, but it is perhaps more likely in a month's time when some evidence that inflation has peaked should be available."
Schmidt said however that a cut today "would not be a major suprise and would likely provide an intial boost to the euro".