The pound and sterling continued to rise against the deutschmark despite further indications of a German interest rate rise being on the way.
The pound closed at DM2.6563 in late trading from DM2.6494 on Wednesday as sterling gained almost three pfennigs. As a result it also fell against sterling, closing at 92.65p from 93.52p a day earlier.
Sterling has now gained almost six pfennigs since it reached recent lows on Tuesday. However, Mr Jim Power, chief economist at Bank of Ireland said sterling was overreacting and would resume its downward path before too long.
"Even if UK rates rise again, sterling should not be rising," he said. "Particularly given that the Bank of England has recently been considering interventions."
According to Mr Power, sterling should be heading for DM2.55, although he wouldn't rule out a short-term jump to nearly DM2.90.
He also pointed out that with longer-term Irish rates falling in a buoyant bond market this week and German rates edging up, the pound was seriously overvalued. "Even if you assume a 5 per cent revaluation, the pound should only be trading at DM2.59 and without one at DM2.48," he said.
Mr Power added that it was likely to head towards those levels once sterling resumed its downward move.
Economic data released in Germany yesterday should also boost interest rate sentiment there. The industrial confidence, or IFO, survey jumped to 98.9 from 98.1 while the markets had been expecting a fall. In addition, the money supply increased. edit Lyonnais Capital Markets in London, the impending G7 meeting limited exchange rate swings. He added that he was not expecting any German rises until next year.
