By Joice Alves
LONDON (Reuters) -Sterling sank to a two-month low against the U.S. dollar on Tuesday, after a Bank of England (BoE) policymaker said the pound could be vulnerable to other central banks' outlooks, while the Federal Reserve chair said interest rates might have to increase further.
The pound could depreciate if investors have not yet fully priced in hawkish messages from the Fed and European Central Bank (ECB), BoE rate-setter Catherine Mann told Bloomberg Television in an interview.
"The important question for me with regard to the pound is how much of that existing hawkish tone is already priced into the pound," she said.
Asked how much of the messages from other central banks about higher interest rates outside Britain had been priced in to the value of sterling, Mann said: "They've been talking hawkish for a while but I think perhaps there's more to go."
Mann's comments came just a few hours ahead of testimony before Congress by Fed Chair Jerome Powell, which pushed the U.S. dollar index more than 1% higher as he said the ultimate level of interest rates was likely to be higher than previously anticipated.[FRX/]
As Mann is considered "the most hawkish member" of the BoE Monetary Policy Committee, her remarks on sterling was not a good endorsement for the currency, said Jane Foley, Head of FX Strategy at Rabobank London.
"Mann was referring to the hawkishness of the Fed driving the U.S. dollar higher versus the pound, but it can be inferred from this remark that she doesn’t expect BoE policy to match the pace of the Fed," Foley said.
The pound has slipped around 1.3% against the dollar so far in March, while the euro was flat versus the dollar.
Money markets are pricing in that the BoE interest rate will peak in September at 4.75%. It currently stands at 4% after ten rate increases in a row since late 2021.
Traders are also attaching a 93% chance of a 25-basis-point rate increase when the central bank meets to decide policy on March 23. There is now 7% chance for a 50 bps hike. There was no probability priced in that the BoE could raise rates by more than a quarter percentage point until Powell's speech on Tuesday. [IRPR].
But markets are expecting bolder moves from the Fed and the ECB until July.
Sterling was down 1.4% against the dollar to $1.1860, after briefly rising to a one-week high in early London trading when data showed British house prices jumped unexpectedly in February, mortgage lender Halifax said.
Against the euro, sterling was 0.5% lower at 89.23 pence.