IT was only a matter of time before the pound fell. Speculation has been mounting in recent weeks that the currency would have to fall against the deutschmark and the other ERM currencies - and hence against sterling - in the run up to monetary union.

Over the past 10 days there has hardly been an Irish trader who has bought the pound, with the Central Bank the only significant buyer. It is conservatively estimated to have spent upwards of £300 million buying pounds in the market in recent weeks to stop the currency from falling sharply.

So it only took a phone call from the Central Bank to traders at the major currency houses to say it was backing off from buying in the market to really let the cat out of the bag.

Sniffing huge profits, the sell orders flooded in from London and later New York. Many were around the £5 million mark, indicating that this was traders having a speculative bet, rather than major investment houses changing their outlook.

It has been accepted for a couple of weeks that the Government would eventually like the pound to trade much lower against the deutschmark. The idea of entering monetary union tied into an overvalued exchange rate was anathema not only to the farmers and exporters but also to many ordinary businesses. But the problem for the Irish authorities is that the pound has been pulled to a high level against the other ERM currencies by the strength of sterling.

The Government is thought to have been keen to see the pound drift lower against the other ERM currencies. The rate at which the pound will enter ERM is unclear. There has been some speculation that it might join at its central rate of DM2.41, although even after yesterday's fall it is well above this level.

It is understood the conversion rates for the French and Germans are likely to be at these central rates. However, given the strength of the currency - and of the economy - the Government may be able to negotiate an exception and enter somewhere around DM2.50. It closed yesterday' around DM2.59.

In any case, the markets decided the pound was a oneway bet and currency traders in London and elsewhere borrowed millions of pounds only to sell them again. They then hope to buy them back later at a lower rate and thus make a profit.

The selling slowed down in the afternoon as many traders were forced to buy the currency to cover their positions and take some profits. It is now open to question whether they will have another go over the coming days.

One possibility is that they feel there is still some way to go and further profits to be made. Analysts in London were yesterday saying that, whatever way the Central Bank plays it, there are substantial profits to be made in the Irish market.

However, it is also possible that the markets may take heed of Minister for Finance, Mr Quinn's statement yesterday, when he said there had not yet been a decision on the rate at which the pound - or any other currency - would enter ERM.

For the moment, the Central Bank seems content to sit on the sidelines and watch the currency drop.

However, the sheer volume of money going through the market - and the demand from investors to borrow pounds which they intend to sell on - forced up the cost of Irish money market rates. For only the third time since the currency crisis the money market rate traded at above the Bank's official Short Term Facility (STF) of 6.25 per cent.

The Bank may be hoping that the increased cost of borrowing is enough to put many of the speculators off. Over the last few days, it has been notable by its absence on the money markets. In the days ahead it could flood the market with cash, pushing down the rates and averting a rise in retail rates.

It is also possible that the Bank may be sending a warning that it is not entirely sanguine on inflation. However, market sources believe the Bank is very unlikely to let money market rates remain at current levels.

By doing so, it would make its job in the currency markets even more difficult and there is even a danger that a rate rise could be discounted by the markets, which may simply believe that it is short term. That, after all, is what happened in the currency crisis in 1993.

The banks and building societies will also be watching developments with interest. If the money market rates stay above 6 per cent for any significant length of time - say 10 days - they will be forced to raise rates for all mortgage borrowers.