What Will Entry in EMS Do to Britain's Pound, Bonds?

Article excerpt

Great Britain's entry into the European Monetary System's (EMS) currency snake - widely anticipated by November-December - is expected to spark little immediate trading reaction, analysts say. It may be the subject of a classic "buy the rumor, sell the fact" response, several agree.

How much selling the pound and UK bonds may experience in the coming months depends more on other factors, analysts note, such as a technical topping considerations and the inflation outlook. But inflation is also tied to the question of entry into the ERM (Exchange Rate Mechanism) from a timing standpoint.

If British inflation numbers are still dangerously near 10%, entry into the ERM would merely pressure the EMS and weaken the sterling further. That might look like a "sell" for sterling traders. Thus, authorities hope to reduce price pressures first so the UK can join the snake in as strong a position as possible.

The width of the trading band would be another factor that could affect trader psychology. If sterling entered the ERM and were allowed to fluctuate within a narrow 3% trading band, some Wall Streeters speculate, the pound would be a "sell."

A band that narrow - for a volatile currency - might press the central bank to intervene constantly in defense of the band. The Bank of England currently does not have to intervene at all against other currencies, analysts say. …