Sterling hit a new 15-year low against the dollar yesterday, as Labour's landslide election victory and William Hague's resignation as Tory leader fuelled speculation about an early referendum on UK euro entry.
Although the Chancellor, Gordon Brown, insisted that the Government's position remained exactly the same and that a decision would be based on whether its five economic tests had been met, a speech by Tony Blair outside of 10 Downing Street raised expectations that the Prime Minister was gearing up for a campaign in support of the single currency.
The pro-euro lobby wheeled out its big guns, with Britain in Europe lining up eight business leaders including the chairman of British Airways, Lord Marshall of Knightsbridge, the former chief executive of BP, Lord Simon of Highbury, and Ford of Europe's senior vice-president Nick Scheele to urge Mr Blair to start the drive for early euro entry.
The pound fell by half a cent within minutes of Mr Hague announcing his resignation and continued its retreat, ending the day a cent down at $1.388 its lowest level since February 1986. Sterling also weakened slightly against the euro, slipping from 61.23p to 61.48p. Julian Jessop, treasury economist at Standard Chartered, said the markets were interpreting Hague's resignation as "another nail in the coffin of the anti-euro campaign". Stuart Green of Credit Lyonnais Securities Europe, said the markets were concerned about the prospect of another "June surprise" a reference to Labour's announcement about Bank of England independence a month after it came to power in 1997.
Mr Green said speculation about euro entry would keep sterling on a weaker footing in the near term. But he said it might be too risky for Mr Blair to press ahead with an early referendum, given the poor performance of the euro and Thursday's very low turnout.
But Russell Jones, head of foreign exchange research at Lehman Brothers, said: "The market realises that the election has given Tony Blair a very large general mandate, such that there are very few obstacles remaining to pushing ahead with a campaign on the euro."
Digby Jones, the director general of the Confederation of British Industry, said it would canvass its members this autumn with a view to conducting a detailed poll in February or March on the level of business backing for the euro.
Mr Jones said the CBI's position remained one of support for entry, provided the economic conditions were right and at a rate of DM2.85 to DM2.90 to the pound. He said the question posed in any referendum should not be "emotional". This suggested that the CBI would back a straight question such as "Do you want Britain to enter the euro?" rather than one referring to Britain dumping the pound, as many Conservatives favour.
The last survey of the CBI membership, in July 1999, produced a 60:40 vote for euro membership. But since then the single currency has weakened considerably. Mr Jones also said if Britain were to enter the euro, it would have the right to demand reforms of the European Central Bank, which has been widely criticised for its lack of transparency.
Mr Jones said the challenge for the new Labour government would be to "build on the hard-won bedrock of economic stability" it had established in its first term, while delivering real improvements in transport and education and ending the "relentless" regulation build-up.
Anthony Goldstone, president of the British Chambers of Commerce, said Mr Blair's victory had created a "mandate for delivery" of an improved skills base, a world-class transport system and economic stability.