Any UK euro entry bets to show up in FX and bond prices

By Swaha Pattanaik - Analysis

LONDON (Reuters) - Sterling's exchange rate against the euro and the premium that UK government bonds offer over German ones are the indicators to watch for the first signals of whether financial markets are betting on British euro entry.

European Commission President Jose Manuel Barroso said on Sunday the global financial crisis had made people who mattered in Britain more open to the idea of eventual euro entry.

That would mark a sea-change from the wariness with which British politicians have traditionally treated any such idea since sterling was forced out of the European Exchange Rate Mechanism in 1992.

While few in the market are giving Barroso's comments much credence right now, financial markets would have to rethink how some British assets are priced if his views were confirmed.

"We take the Barroso comments with a large pinch of salt but if anyone were to seriously believe that the UK might enter the euro, they would have to decide on the timeframe and then look for the entire (UK) yield curve to converge towards the French or German ones over that period," said Hans-Guenter Redeker, global head of foreign exchange research at BNP Paribas.

"If you really believed this, you would also buy sterling like there was no tomorrow," he said.

SUICIDAL FX RATES

Sterling has shed a fifth of its value against the single currency over the past two years and is trading at about 0.85 per euro.