The euro was on recovery at the start of the week, after favourable eurozone data, while the pound was slightly on the back foot ahead of Thursday's Bank of England decision.

The euro rose to USD1.1021 on Monday afternoon London time, from USD1.1000 on Friday. The pound faded to EUR1.1659 from EUR1.1679.

Eurozone inflation fell in line with market expectations, according to data on Monday, as the single currency area also returned to growth during the second quarter of 2023.

Eurostat said the single currency area's yearly inflation rate faded to 5.3%, according to a flash estimate, from 5.5% in June. The figure was in line with FXStreet consensus.

The eurozone inflation rate faded markedly from 8.9% in July 2022. It peaked at 10.6% in October.

Eurostat said that seasonally adjusted gross domestic product increased by 0.3% in the eurozone in the second quarter of 2023, compared to the first quarter. This preliminary flash estimate comes in ahead of FXStreet consensus of 0.2%.

In the first quarter of 2023, GDP had fallen by 0.1% in the eurozone quarter-on-quarter.

"These mixed data allow the ECB to both argue for a longer hold as well as for another hike. We still expect that the ECB is done hiking rates, but a setback in the data over the summer could push the ECB towards another hike," Rabobank analysts commented.

The euro traded as low as USD1.0943 on Friday, struggling after European Central Bank lifted rates by 25 basis points on Thursday, but suggested a pause could be in its thinking for its next decision.

The pound faded to USD1.2849 on Monday afternoon in London from USD1.2853 on Friday ahead of the BoE's decision later this week.

Deutsche Bank analyst Sanjay Raja expects a 25 basis point hike, which would take the benchmark rate to 5.25%. It will be a close call between that outcome and a chunkier 50 basis point hike, however, the investment bank believes.

"Beyond next week's decision, Sanjay sees two more 25bps hikes, with rate cuts potentially starting from Q2-24," Deutsche Bank added.

Rabobank analysts said that the market is "still debating whether the BoE will hike rates this week by 25 bps or 50 bps".

"In our view, the MPC will opt for a 25-bps rate hike this week with signs of slowing levels of activity in the UK supporting this view. That said, we see risk that two policymakers will vote for another 50 bps move while one is likely to favour no change," analysts at the Dutch added.

The BoE also sets out its latest economic projections in its monetary policy report on Thursday.

The most optimal outlook for GBP bulls from this week’s BoE policy meeting would be a hawkish outlook combined with UK growth forecasts that avoid recession," Rabo analysts added.

Elsewhere on Monday, the dollar rose to CHF0.8729 on Monday from CHF0.8692 on Friday. It climbed to
JPY142.24 from JPY140.36.

The greenback surrendered some ground against its Australian and Canadian counterparts, however, fading to AUD1.4906 from AUD1.5023 and CAD1.3210 from CAD1.3227.