All eyes will be on the Bank of England on Thursday when the monetary policy committee makes its latest announcement on interest rates.
It has a difficult decision on whether to lift interest rates from 0.75% to 1% - the highest level since the financial crisis.
Many traders and economists expect the rate-setters to lift borrowing costs again to limit mounting price pressures.
However, an already-weak pound could come under further pressure if the committee sends a dovish message by signalling a more-restrained approach to rate increases.
Morgan Stanley economist Bruna Skarica told the Telegraph that this week's meeting of the committee "should be crucial in setting the tone for the Bank of England for the rest of the year".
Philip Shaw, from Investec, said sterling's recent falls were "unlikely to sit comfortably with the MPC".
He added: "First, the weaker currency will add to inflation. Second, the committee may harbour fears over a further sell-off in the currency if markets consider that the BoE is neglecting inflation."
Economists have warned that the weak pound will pour fuel on Britain's cost-of-living crisis.
Sterling has dropped by 8% this year, which in itself will add 0.7% to inflation. Price rises have already hit a 30-year high of 7%.
Markets are betting that the US Federal Reserve will hike interest rates at a quicker speed than the Bank of England.
Combined with fears of a recession in Britain, this contributed to the pound sinking to a 21-month low against the dollar.
Economists fear the UK will be among the countries hardest hit by the cost-of-living squeeze.
Paul Dales, chief UK economist at Capital Economics, said to the Telegraph: "The weak pound is another inflationary source at a time when inflation is already at a 30-year high of 7% and is heading to a 40-year high of 10%."
He said the current fall in sterling versus the dollar would add 0.7% to inflation over the next four years, including 0.4% in the next year.
Sterling has slipped from above $1.40 against the dollar just under a year ago to below $1.25.
The pound is currently down a smaller 3% against a trade-weighted basket of all currencies. If sterling suffered similar falls against all currencies, it would add 2% to inflation in the coming years. Mr Dales said the pound will likely fall to $1.22 versus the greenback by the end of 2022.
FTSE 100
The UK's leading share index, the FTSE 100, closed up 35 points at 7,544 on Friday. The London Stock Exchange is closed today due to a bank holiday.
Brent crude futures were down 0.93% at $106.01 a barrel earlier today.