THE strength of the pound is continuing to hit export demand, but the sharp deterioration in order books recorded in the middle of the year appears to have halted and manufacturers' export orders showed a modest improvement in December, according to the CBI's latest Monthly Trends Enquiry.

The December survey, conducted between November 21 and December 8, shows that 13% of manufacturers consider their export order books to be above normal, while 42% say they are below normal, leaving a negative balance of 29%.

This compares with negative balances of 34% in November and 33% in October.

Domestic orders are still holding up and together with the slight improvement in export orders, this is reflected in a small improvement in overall demand with a balance of 2% of firms reporting their total order books above normal.

This is the first time since August 1995 that a positive balance has been reported and compares with negative balances of 3% of firms in November and 2% in October.

Manufacturers' expectations in the month confirm the slowdown in output growth predicted in the November survey.

This month's balance of 10% of firms expecting higher output over the next four months compares with those of 9% in November and 20% in October. With the exception of last month, December's balance is the least positive recorded in a monthly survey since December 1995.

Domestic prices are expected to rise over the next four months, as indicated by a balance of 3% of firms compared with a negative balance of 1% in November and positive balance of 2% in October.

However, price expectations in this survey are significantly lower than reported this time last year, indicating that the outlook for output price inflation remains highly promising.

Sudhir Junankar, the CBI's associate director of economic analysis, commented: ''The slight improvement in export demand over the past month provides a welcome breathing space for hard pressed exporters. However, this cannot disguise the fact that sterling's strength is still having an adverse effect on the ability of companies to attract orders from overseas customers.

''Although domestic demand continues to hold up, the survey confirms that weak export orders are making companies much less optimistic than they were just two months ago about raising output over the short term.''

James Capel's economist Adam Cole said the survey does little to change the picture of a steady recovery in output and nothing in the way of price pressures in manufacturing industry.

A slight recovery in export orders was sufficient to pull order books into positive territory for the first time since mid-1995 and may be the first sign that the worst is over for exporters.

But with considerable weight attached to the service industries, the data does little to change the outlook for policy.