LONDON; Sterling fell against the euro on Tuesday with investors wary ahead of UK inflation data that could reignite talk of more easing by the Bank of England if it undershoots expectations, leaving the pound vulnerable to more selling.
Consumer price inflation, released at 0830 GMT, is expected to hold steady at 3.0 percent in May, unchanged from the previous month.
Analysts said a higher-than-expected number would bolster the pound as it would reduce the likelihood of further monetary easing by the BoE, while a weaker reading could be taken to be negative. Quantitative easing is usually considered bearish for the currency as it increases the supply of pounds in the system.
The euro rose 0.2 percent to trade at 80.44 pence, with traders citing stop loss orders above 81.20-30 and resistance seen around the June high of 81.63 pence.
Against the dollar, sterling was 0.1 percent firmer at $1.5677.
"CPI data below 3 percent could prompt a move lower for the pound after Sir Mervyn King already hinted at further QE (quantitative easing) in the UK, and lower inflation would open the door for that," Craig Erlam, market analyst at Alpari, said.
A growing number of analysts think the BoE could opt for another bout of asset purchases, particularly given the fresh flare ups in the debt crisis in the euro zone, the UK's biggest trading partner.
Bank of England governor Mervyn King said in a keynote speech last week that the euro zone was casting a "black cloud" over the UK economy, making a case for more QE. He said the BoE would also provide cheap long-term funding to banks to encourage them to lend to businesses and consumers.
On Wednesday traders will scrutinise minutes from the latest BoE meeting that are expected to give clues on whether policymakers are leaning towards further stimulus.
"Indications of softer than expected headline inflation could highlight the risk of more monetary accommodation ahead," said Valentin Marinov, currency strategist at Citi.
"Sterling could remain under pressure ahead of the BoE minutes tomorrow which could corroborate the view that the next bout of asset purchases could come as soon as July."
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