Sterling has been dropping over the past couple of days, with the pound now heading towards 88p.

Sterling has slipped against the deutschmark and the dollar as British growth figures failed to dent the market's belief that British interest rates have peaked. However, the fall did not go as far as overnight lows on Thursday, when sterling plunged.

"The growth figures will not support sterling but we need some confirmation of weakness before we can talk about interest rate cuts," said Ms Jane Foley, currency strategist at Barclays Capital. As a result, the pound closed at the same level as yesterday, at 87.68p against sterling.

According to Mr Jim Power, chief economist at Bank of Ireland, the weak British data had offset some of the negative sentiment form the high inflation figures on Tuesday. On top of that, President Suharto's resignation meant the dollar lost some of its safe haven status and fell back slightly.

The British data revealed that first-quarter gross domestic product was up a revised 0.5 per cent quarter-on-quarter and 2.9 per cent year-on-year. Consumer spending rose by only 1 per cent over the quarter and 5.1 per cent over 12 months, although this is the highest since the fourth quarter of 1988.

According to Mr Power, it is now possible that sterling could fall as low DM2.60 by the end of the year, which would put the pound at 95p.

"This is excellent news for Irish inflation, although it will take some time to feed through," he said.