European stocks were subdued on Monday, losing steam following a rally last week as higher German inflation and warnings on a weaker pound hit sentiment.
Experts at the Bank of America (BoA) warned that the pound (GBPUSD=X) is facing an "existential crisis" and is likely to weaken further during this year.
Kamal Sharma, a London-based foreign exchange analyst for the Wall Street lender, said the outlook for the pound was "grim" in a note to clients.
Sterling has fallen around 6.6% this year in dollar terms, leaving it as one of the worst performers among the world’s top currencies. Only the Norwegian krone, Swedish krona and Japanese yen have fallen further.
"Sterling's fall from grace has been epic given last year's euphoria and in many ways has caught the investor community by surprise," Sharma said.
He also warned that the Bank of England faces "unique" challenges including Brexit that are creating severe supply-side problems.
"This has resulted in a confusing communication strategy: hiking rates against a sharply slowing economy is never a good look for any currency."
It comes as inflation data from Europe came in hot on Monday, with Germany hitting another all-time high as numbers from Spain also topped economists’ estimates.
Consumer prices in the continent's biggest economy jumped 8.7% from a year ago in May, driven by soaring energy and food costs. Analysts expected a rise to 8.1%.
The latest figures put more pressure on the European Central Bank to take action to tame surging prices.
"Becalmed UK markets have been unable to extend the enthusiasm for the equity rally seen last week," said Chris Beauchamp, chief market analyst at online trading platform IG.
"The US drove the bounce last week, and with the Americans at leisure today, the FTSE has found it almost impossible to maintain the bullish atmosphere."
Oil prices were boosted as China eased COVID restrictions after nearly three months of lockdowns.
Traders are also anticipating an EU deal to limit Russian oil imports ahead of meetings on Monday and Tuesday. Members will discuss a sixth package of sanctions against the Kremlin for its invasion of Ukraine.
Across the pond, US benchmarks snapped a losing streak last week as investor optimism was lifted by a slew of economic and corporate releases on hopes that inflationary pressures may have peaked.
Markets in America are closed today for Memorial Day holiday.
Wall Street’s S&P 500 (^GSPC) advanced 100.40 points, or 2.5%, to 4158.24, notching its best week of 2022 after severe losses in previous sessions that nearly ended its bull market. The tech-heavy Nasdaq (^IXIC) increased 3.3%. The Dow Jones (^DJI) added 1.8% on Friday's close.
Richard Hunter, head of markets at Interactive Investor, said: "Asian markets added to the positive momentum as China began to ease lockdown restrictions in both Beijing and Shanghai.
"The Premier has announced that there will be a range of measures aimed at boosting a beleaguered economy, with more detail to follow shortly.
"However, the damage has largely been done over the last few months, with an inevitable drop in consumer sentiment tied to a soaring unemployment rate, and with many economists predicting a contraction in the current quarter.
"Even so, a perceived improvement to the fractious US/China relationship has also improved sentiment, particularly given the limitations which global economies have had to endure this year."