LONDON: Sterling edged down against both the dollar and euro on Monday, with investors eyeing testimony from the heads of the British finance ministry and Bank of England (BoE) later in the week for direction.
The pound had hit a three-month high last week against the euro and a trade-weighted basket of currencies as expectations grew that policy would be eased still further in the euro zone, Britain's main trading partner.
By contrast, the next policy move from the BoE is expected to be an interest rate rise. But markets have pushed out to the end of 2016 their bets on when that hike will come , roughly a year later than expectations of a December rate hike from the U.S. Federal Reserve.
Sterling fell by a third of a percent on Monday to $1.5148 , taking it closer to a seven-month trough of $1.5027 hit earlier this month. Against the euro, it inched down 0.1 percent, to 70.10 pence.
BNP Paribas currency strategist Sam Lynton-Brown said sterling's weakness was mostly a function of broad dollar strength, and that the bank remained bullish on sterling over the medium term.
"We think the market is underpricing the likely timing and pace of Bank of England hikes," he said. "The market only prices the first BoE hike by Q1 2017. Our economist still thinks they go in May."
Asset managers at a Reuters summit last week said markets had not even begun to discount the chance that Britain could vote to leave the European Union next year, raising the risk of volatility closer to the vote. The referendum, they said, could also complicate the timing of any rate rise.
BoE Governor Mark Carney will give testimony at a Treasury Select Committee in parliament on Tuesday, and will be closely watched for any clues on future rate hikes.
"Given the fallout from the dovish November Inflation Report, the risks are skewed towards the Governor sounding more hawkish," ING currency strategist Chris Turner wrote in a note to clients. "We suspect he will send a strong message that a 2016 rate hike remains very much on the table."
Investors are also eyeing Wednesday's "Autumn Statement" by British finance minister George Osborne, which will be accompanied by economic forecasts from the Office for Budget Responsibility.
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