LONDON: Sterling edged away from a 9-1/2 month low against the euro on Tuesday as investors took profit on the euro's recent gains, but it remained vulnerable to renewed selling on concerns about a fragile British economy.
Data showed UK annual CPI inflation remained at 2.7 percent in December, in line with expectations and staying well above the Bank of England's 2.0 percent target.
Elevated inflation may discourage the bank's policymakers from opting for further quantitative easing in the coming months and the pound rose very briefly against the dollar after the data.
However, it quickly turned lower, with analysts saying there were concerns that high inflation could worsen an already weak economy by reducing British consumers' spending power.
Traders also said some in the market had positioned for an above-forecast number.
"There was a bit of a muted reaction to the CPI data. It didn't deliver any shocks and was hard for the market to get too excited about," said Lee McDarby, head of dealing for corporate and institutional treasury at Investec.
The euro was down 0.1 percent at 83.12 pence, although it stayed not far from Monday's peak of 83.26 pence, its strongest level since early April 2012.
Traders said the euro could face stiff resistance at 83.33 pence, equivalent to 1.20 euros per pound, a key level for UK companies looking to hedge their foreign exchange exposure.
"Traders are wary that the 1.20 level in sterling/euro is a massive psychological level and that in the first quarter of last year it proved a big pivot point for over three months," Investec's McDarby said.
But some analysts saw scope for more gains for the euro in the wake of last week's more positive assessment on the outlook for the euro zone economy from European Central Bank President Mario Draghi.
Nawaz Ali, currency analyst at Western Union, said this could lift the euro towards 84 and possibly 85 pence, especially given investors' concerns about the UK economic outlook.
"High inflation is not what long-term investors will be looking for," he said, adding that strong price pressures would make it difficult for the UK economy to stabilise.
Against the dollar, sterling was down 0.15 percent at $1.6051, having briefly hit $1.6101 after the UK inflation data.
It dropped below chart support marked by the 100-day moving average at $1.6070 and the 55-day moving average at $1.6067.
The pound stayed stuck in a range above this month's low of $1.5992 but below Friday's peak of $1.6182.
Sterling's trade-weighted index was at 82.6, just above a seven-month low of 82.5 reached on Monday.
A better-than-expected UK house price survey on Tuesday was offset by news that UK music and DVD retailer HMV has gone into administration, putting around 4,000 jobs at risk.
Some analysts said speculation whether the government will call a referendum on Britain remaining in the European Union was also unnerving sterling investors.
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