First the UK's new Labour government dropped hints that it was gearing up to join Europe's single currency earlier than expected, and before the full launch in 2002. Then it seemed to pull back and suggest that UK entry would not happen in the five-year life of the current parliament. That's made for continued uncertainty. Financial markets want to know when.
In October 1996 I argued that the UK would eventually have to join the European Union's monetary union if the new system went ahead. Ever since, I have been advising clients to go long gilts as a spread play to Bunds, and UK equities. The mixed signals coming from the Labour government do not change my view. The UK will join, and ultimate convergence will put its government bond yields below those in France and Germany, and sterling close to Dm2.50.
There are sound economic reasons for the UK to sign up to the single currency. Outside a weak euro area, the UK would lose competitiveness on over half its exports. So jobs would be lost. Outside a strong euro area, the UK would suffer high interest rates - the penalty of a risk premium for living in a financial twilight zone.