By Stefano Rebaudo

(Reuters) - Sterling edged lower against a strengthening dollar and held steady versus the euro a day after the British government's pledge to increase military spending.

The U.S. dollar edged up from its 11-week low on Wednesday as U.S. Treasury yields bounced back after recent declines.

British Prime Minister Keir Starmer said on Tuesday he would increase annual defence spending to 2.5% of gross domestic product (GDP) by 2027 and target a 3% level last seen just after the Cold War, a signal to U.S. President Donald Trump that Britain can boost Europe's security.

Sterling was down 0.1% to $1.2653. It hit $1.2626 on Monday, its highest level since December 18.

"We think sterling can start to underperform in March," said Chris Turner, head of forex strategy at ING.

Some analysts argued that the Bank of England could unlock more cuts in line with the recent dovish shift.

BoE policymakers do not have a consensus about how fast the central bank should cut interest rates, even though they all agreed to use the word "gradual", Monetary Policy Committee member Swati Dhingra said on Monday.

Dhingra was one of two Monetary Policy Committee members to vote for a half-point interest rate cut on February 6, while the majority voted for a quarter-point cut to 4.5%.

Investors are closely watching developments in U.S. trade policy but expect U.S. tariffs to hurt the economy more in Europe than in the UK. However, they expect the U.S. protectionist measures to weigh on all European currencies.

The euro was down 0.05% at 82.92 pence. It hit 82.63 pence on Friday, its lowest level since January 2.

Markets expect the BoE to cut rates by 57 basis points (bps) in 2025 and the European Central Bank to ease by 80 bps.

However, recent remarks from ECB officials have cast doubt on the monetary path traders are currently pricing in.

ECB board member Isabel Schnabel said it's no longer clear the current 2.75% rate is still holding back the euro zone economy after arguing last week the ECB had to start a discussion about when to halt rate cuts.

(Reporting by Stefano Rebaudo; editing by)