LONDON: Sterling dipped against the euro on Monday but was steadier against the dollar after a weekend summit of financial leaders that raised more questions about how fast U.S. and UK interest rates can rise amid a global struggle for growth.
Money market rates have already shown investors backing off the expectations of a Bank of England rate hike this year that drove sterling to a six-year peak against the dollar in July.
Concerns that the euro zone may be moving towards another recession and potentially a more extended vicious cycle of ultra-low inflation and economic stagnation are also bolstering the argument of those saying rates will not rise until the second half of 2015.
Sterling was a third of a percent weaker against the euro, trading at 78.79 pence per euro. It was less than 0.1 percent higher against the dollar at $1.6087.
"I think the Bank of England will still raise rates before the Fed next year, but it is very reliant on the service sector in the UK holding up," said Adam Myers, head of European FX strategy at Credit Agricole in London.
"If anything happens to undermine that picture then we could see the BoE very quickly turn around and hold rates until at least the end of the first quarter."
Myers, however, remains broadly positive on sterling going forward.
On the one hand expectations the Bank of England could move before most of its peers were at the heart of sterling's bullish run last year, and any fall off in those will undermine it, particularly against the euro.
But the euro zone is quickly becoming the world's central economic concern again, which is likely to hurt the single currency more in the months ahead. Equally, U.S. Federal Reserve officials have begun voicing concern over the scale of the dollar's rally since May.
"We think the dollar is going to weaken a bit into the end of the year," Myers said. He has sterling at $1.66 and 77 pence per euro respectively in December.
Domestically, the week should be dominated by consumer inflation numbers on Tuesday and a monthly report on the labour market on Wednesday. The failure of real wages to pick up has been the big hole in the argument for raising UK rates so far.
Investors have also begun to focus more on political risk in the United Kingdom.
Latest polling showed support for anti-EU party UKIP at 25 percent and the party's leader said he would demand an immediate referendum on European Union membership as the price of supporting any coalition government after elections next May.
"I think most people still think this is a temporary phenomena that will not prove be as important a factor in the elections as it looks at the moment," said a dealer with one London-based bank.
"But there's no denying the nerves it will stir up in the run-in if support for UKIP does not fall off."
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