Sterling traded at a 10-week peak against a basket of currencies on Monday, with investors reluctant to take new positions ahead of this week's annual budget, U.K. inflation data and central bank minutes.
An absence of UK data on Monday meant market players' next focus was Tuesday's consumer price numbers, expected to show annual inflation easing slightly.
Bank of England minutes, which may give signs on whether policymakers would consider another round of asset buying, and finance minister George Osborne's budget on Wednesday were also likely to impact investor sentiment towards the UK currency.
Trade-weighted sterling held at 81.7, the 10-week high hit on Friday after slightly softer-than-expected U.S. inflation data boosted the pound against the dollar. Further gains would put trade-weighted sterling at its highest level since February 2011, though many strategists said they expected moves the UK currency to be subdued on Monday.
After last week's moves the market will be on the back foot, said Jennifer Hau, currency strategist at Lloyds Bank.
There will be a focus on CPI data tomorrow. If inflation pressures are easing there could be scope for more QE (quantitative easing). That said, if inflation is holding up I do not think that will impact too much on the BoE's view for QE as there will also be focus on recent economic data from the UK.
Quantitative easing is considered to be negative for a currency as it involves flooding to economy with cash to stimulate growth, which can crimp demand. Sterling dipped 0.1 percent against the dollar to $1.5825, with traders citing supportive bids around $1.58 and $1.5780. A large option expiry was reported at $1.5805.
Hau said key resistance was seen at the 200-day moving average around $1.5861, the level that capped Friday's rally. Technical strategists said a break above that level could open the door to a test of the February peak just below $1.60.
The euro slipped 0.1 percent against the pound to 83.02 pence, hovering near a one-month trough of 82.93 pence.
Morgan Stanley strategists said the euro could come under further pressure against the pound if the government used the budget to reduce the highest income tax rate and the corporate tax rate, which may increase incentives to invest in the UK.
GBP (sterling) is expected to be in focus this week, with market expectations increasing that the UK budget will deliver business-friendly tax adjustments. We expect a near-term GBP rebound as a result, strategists said in a note.
(Editing by John Stonestreet)