LONDON: Sterling slipped on Monday with investors awaiting cues in coming days from a mid-year budget review from the finance minister and testimony from Bank of England officials - both potential triggers for volatility.
The pound 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.
The next policy move from the BoE is expected to be an interest rate hike, but markets have pushed out to the end of 2016 their bets on when that will happen, roughly a year later than expectations of when US rates will rise.
Sterling fell 0.2 percent to $1.5165, not far from a seven-month trough of $1.5027 hit earlier this month. Against the euro, it inched down 0.15 percent to 70.15 pence, with the single currency boosted by better than expected surveys from the euro zone that showed business growth at four-year highs.
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." BoE Governor Mark Carney and other policymakers including chief economist Andy Haldane will give parliamentary testimony on Tuesday and their comments will be closely watched for any clues on future rate hikes. Earlier this month, Carney cooled expectations of a rate hike in early 2016 by flagging risks to growth from external developments.
Investors are also looking ahead to Wednesday's statement from George Osborne, accompanied by a spending review and economic forecasts.
"Further significant fiscal tightening is expected by the market, which our economists suspect could lower growth by as much as 0.5 percentage points next calendar year," Morgan Stanley said in a note. "We expect sterling/dollar to come under pressure."
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