Sterling is set to take centre stage in currency markets as investors look forward to UK consumer price inflation data for clues on the future path of local monetary policy. Inflation is forecast to drop closer to the Bank of England’s target levels which could potentially give policymakers space to inject more cash into the UK economy which has slipped back into recession. The pound is already losing popularity amongst traders ahead of a busy week of UK releases. In addition, the UK’s unquestionable exposure to Europe’s debt woes is also damping demand for the pound. Still, broader market direction and trading sentiment is being dictated by eurozone concerns, although the euro and other currencies closely tied to risk-taking found tentative support on expectations officials in Europe could begin work on a more comprehensive anti-crisis response. The euro’s upside potential, however, is likely to remain limited until new elections in Greece on June 17th that should help corroborate fears of the country’s looming exit from the euro area.

Sterling

Sterling is set for the first of a number of big tests this week in the form of economic data releases that could go a long way towards shaping the UK currency’s near-term outlook. The pound was unable to steer to far from two-month lows against the US dollar and is now valued at almost two per cent below the 3½ year high it had breached against the euro last week with the UK’s exposure to the eurozone debt crisis also becoming more evident.

US dollar

A tentative recovery in sentiment lessened demand for the US dollar as investors took to more risky stocks and currencies at the expense of safe haven assets. Still, the dollar remains close to four-month and two-month high against the euro and British pound respectively as persistent uncertainties about the economic and political turmoil in Europe continues to underline its position as a place of safety.

Euro

Comments from world leaders over the weekend, who appeared to back a more growth-orientated approach to tackling Europe’s debt troubles, have raised hope that the informal eurozone summit could help add another instrument to Europe’s fire-fighting tool-kit. As a result, the euro changed hands at price levels just above last week’s four-month low against the US dollar with investors moving to cover their short euro balances. Nonetheless, the euro remains under widespread pressure ahead of June 17 elections in Greece that may ultimately result in the country’s exit from the single currency bloc and upcoming eurozone data that is forecast to show several economies failing to cope with austerity.