Sterling dips below $1.40 on U.S. Fed's hawkish surprise

By Joice Alves and Iain Withers

LONDON (Reuters) -Sterling fell below $1.40 against a strengthening dollar on Thursday after the U.S. Federal Reserve surprised markets by signalling it would raise interest rates and end emergency bond-buying sooner than expected.

U.S. central bank officials on Wednesday projected an accelerated timetable for rate hikes, as they began closing the door on the Fed's pandemic-driven monetary policy.

The move pushed U.S. Treasury yields higher, while equities fell.

The pound fell 0.3% versus the dollar to $1.3949 at 1445 GMT on Thursday, after diving 0.7% in the previous session, taking cable below $1.40 for the first time since early May.

"There has been no fundamental developments overnight driving the pound; rather, selling pressure seems to reflect the broader strength in the USD," said Shaun Osborne, chief FX strategist at Scotiabank.

News of the rapid spread of the Delta COVID-19 variant in the UK weighed marginally on sentiment, he added.

Against the euro, the pound was up 0.3% on the day, hitting 85.54 pence per euro, after jumping to its highest level of 85.42 pence since early April in earlier trade.

Lee Hardman, currency economist at MUFG, said sterling's strength versus the euro reflected bets that the Bank of England could follow the Fed's lead and tighten policy faster than the euro zone.

"It's a reflection of the view that the BoE is likely to be one of the first central banks to raise rates as well. If the Fed is willing that could give the BoE confidence to move earlier," Hardman said.

Currency markets are fully pricing in a 25 basis point hike in rates by the BoE by December 2022.

In the meantime, data on Wednesday showed inflation in Britain unexpectedly jumped above the central bank's 2% target in May.

(Reporting by Joice Alves and Iain Withers; Additional reporting by Saikat Chatterjee; Editing by Gareth Jones and Richard Chang)