The pound dropped decisively below DM2.60 on Sunday night as it became clear that French voters had narrowly backed the Maastricht treaty. The currency continued to drift lower yesterday on the belief that Britain would remain outside the exchange rate mechanism for some time and that this would give the Government scope to cut rates.
The pound closed yesterday at DM2.5376, down 7.31 pfennigs from Friday's close. In part this reflected residual selling pressure from last week, the effect of which had been delayed by profit-taking.
Sterling is now more than 24 pfennigs below its former ERM floor and has in effect been devalued by almost 14 per cent from its old central rate of DM2.95.
The pound also dropped by three cents against the dollar to dollars 1.7130. Against a trade-weighted index of other currencies the pound ended the day worth 83.6 per cent of its 1985 value, down 1.9 percentage points on the day. This is 8 per cent below last Tuesday's close and the devaluation.
The dollar dropped by just over a cent against the mark to DM1.4860 as the US currency lost some of its status as a 'safe haven' from European turmoil.
The ERM remained tense. The Banque de France was reported to be support-buying the franc during the morning. The French currency closed at Fr3.4213 per mark, less than a centime above its floor of Fr3.4305. The Danish krone and Irish punt remained under pressure while the Portuguese escudo was only supported at the top of the system by high overnight interest rates.
Belgium and the Netherlands reduced their interest rates slightly in response to the flow of investors' funds into currencies closely linked to the mark.
Hopes of an interest rate cut in Britain took hold in the money markets. The three-month inter-bank interest rate - which tracks City base rate expectations - fell by more than half a percentage point from Friday's close to 9 3/8 per cent. This discounts at least a half-point cut in base rates from their current 10 per cent.
'I think there is a very good chance of a rate cut this week,' said David Simmonds, economist at Midland Montagu. He added that the Chancellor was likely to time any cuts with Thursday's Commons debate and next month's Conservative Party conference in mind.
City economists believe interest rates may be as low as 8 per cent by the end of the year.
The stock market began the day strongly on hopes of an interest rate cut. By mid-morning the FT-SE index of 100 leading London shares was 44.2 points higher than Friday's close.
But profit-taking and doubts about the size and timing of a rate cut put the market into reverse. At the end of a heavy day's trading the index closed 6.9 points down at 2,560.1.
Hopes of British base rate cut came as a new survey was published showing that employers are becoming more gloomy about the outlook for jobs, with a growing number of companies forecasting staff cuts in the next three months.
The latest report from the employment agency Manpower shows that a balance of 1 per cent of employers expects to make job cuts in the last quarter of the year. In its previous quarterly survey a balance of 6 per cent said they expected to take on more staff.
Job losses will be heaviest in banking, local government and the construction, energy and water industries, Manpower said.
However, retailers, clothing manufacturers, insurers and companies involved in hotel and catering and transport and distribution expect to recruit more staff.
Regionally, the outlook is bleakest in the North-west, East Anglia, the Home Counties, the South and West Midlands.
But a balance of employers in the North-east, South Wales, Scotland, the West, the East Midlands and Yorkshire and Humberside expect to take on more staff.
According to the Manpower survey of 2,000 employers, 18 per cent expect to cut jobs, 17 per cent expect to increase staffing and 63 per cent forecast no change.