Sterling has continued its fall against the euro in a development which could prove favourable for Irish inflation. Analysts say sterling's reversal over the past few days could be the start of a trend which will see the pound gaining ground.

Efforts by the Bank of England to talk sterling down appear to be working, and the euro ended the day yesterday at 61.29p against sterling, from 60.52p. As a result, the pound closed at 77.90p, from 76.84p a day earlier.

The euro also gained a little against the dollar, closing at $0.9044, from $0.9033 a day earlier.

The markets have now taken the differing rate expectations in the three areas into account. There is a possibility that eurozone rates will rise tomorrow, or certainly during June, while British rates now look as if they are on hold and US rates have already risen as high as 6.5 per cent this month

Sterling is now down about 6.5 per cent from the 14-year highs it scaled earlier this month against a trade-weighted basket of currencies of Britain's main trading partners.

Members of the Bank of England's monetary policy committee (MPC) made their comments about the strength of sterling very clear in response to questions from the British treasury select committee.

Bank of England governor Mr Eddie George said it was certainly not right to conclude that interest rates had peaked, but added that the bank would prefer a lower value, combined with slower domestic demand. This was echoed by deputy governor Mr Mervyn Taylor and follows comments late on Monday by new monetary policy committee member Mr Steve Nickel that the pound would at some point fall significantly against the euro, with a fall likely sooner rather than later.

Analysts said the tide may now have turned for sterling's performance against the euro and the broader trade-weighted index. According to Dr Dan McLaughlin, chief economist at ABN Amro, British manufacturing is now technically in recession and even retail spending has been surprisingly weak. "There is a view that the UK economy has peaked, and that is driving the currency lower," he said.

Mr Jim Power, chief economist at Bank of Ireland, also pointed to lower-than-expected inflation in Britain and the news that at the last meeting the MPC had voted nine-to-nil to hold rates steady.