The pound touched a near three-week low versus the dollar on Monday as traders unwound bets of a super-sized U.S. rate cut next week and awaited readings on the domestic economy that could dictate expectations around UK interest rates.
Sterling fell 0.42% to $1.30745 - its weakest since Aug. 21.
Most major currencies were also under pressure as the dollar recovered from last week's declines after Friday's data showed U.S. employment grew less than expected in August, but indicated only a steady slowdown in the labour market.
Traders ramped up bets of a 50-bps rate cut from the Fed to more than 50% on Friday, but it fell to 25% on Monday as they judged the data was not enough for a panic move by the Federal Reserve.
Investors will look to UK labour market data, British GDP figures for July as well as U.S. inflation data this week for clues on the direction of monetary policy on both sides of the Atlantic.
Britain's labour market cooled noticeably last month as job placements fell sharply and pay growth slowed, a survey of recruiters showed on Monday. Official data on Tuesday are expected to show robust employment growth and a further moderation in pay growth.
"Any upside surprise to the UK data (wage growth is expected to slow to 5%, 3m/3m GDP to grow by 0.6% and monthly GDP by 0.2%) could open the door to EUR/GBP trading below 0.84," Societe Generale's FX strategist Kit Juckes said in a note.
Euro/sterling climbed for a seventh straight day, trading marginally higher at 84.84 pence per euro.
Traders are pricing in 45 basis points (bps) of rate cuts from the Bank of England (BoE) by the end of this year, versus 112 bps from the U.S. central bank, market pricing showed.
Growing divergence in the monetary policy outlook of both countries lifted the pound to more than two-year highs last month. While the BoE is mostly seen holding rates next week, traders are pricing in a 69% chance of a 25-bps rate cut in November.
(Reporting by Sruthi Shankar in Bengaluru; Editing by Andrew Heavens)