Trade figures and EMU delay give sterling an exchange rate boost

Sterling bounced back on the foreign exchanges yesterday after better trade figures and a belief that Britain's entry into the single currency may be several years off saw it make gains against the euro and the dollar.

The pound recouped half Monday's losses which were triggered by Gordon Brown's decision to leave open the door for a referendum on euro entry next year coupled with Treasury studies showing sterling would have to weaken substantially first.

"After a vicious sell-off, the market is paring back expectations sterling would have to depreciate," said Mark Austin, chief currency strategist at HSBC Markets.

Sterling reached $1.6575 and 70.50p against the euro following comments from the chancellor in his joint press conference with Tony Blair that the government did not have a set exchange rate for Britain to join the single currency.

After digesting the City's reaction to the 18 studies accompanying the euro assessment and the morning press, traders were betting that the obstacles to entry would not be overcome in time for a referendum ahead of the next election. The fine print of the statement made it clear that reforms of Britain's housing market, the European Central Bank, and the stability and growth pact were a condition of the Treasury revisiting the five tests.

"The market's sensitivity to the EMU entry debate will fade. It will resume being driven by demand for yield and for currencies which have higher short-term interest rates, like sterling," said Steven Pearson, chief currency strategist at Halifax Bank of Scotland.

Better trade figures also boosted sterling. The UK's visible trade gap narrowed to £3.1bn in April from £3.4bn in March, according to the Office for National Statistics, with the trade outside the eurozone registering the biggest improvement.

But the eurozone's economic sluggishness took its toll on UK exports to Europe which fell by £500m on the month. As a result, the trade gap with Europe widened to £1.6bn, the largest monthly deficit for more than 13 years.

"For now the weakness of the European economy seems to be having the decisive impact on the UK's trade performance with Europe," said Jonathan Loynes, chief UK economist at Capital Economics.

The deficit with the rest of the world fell from £2.3bn in March to £1.4bn in April, with a big rise in Britain's trade surplus with the US. The UK's trade surplus in services stood at £1.2bn, leaving an overall deficit on goods and services of £1.9bn.

Any noticeable and sustainable boost to Britain's trade performance from the fall in sterling against the euro was not likely to materialise until later in the year, analysts said.