Investors are currently fully pricing in a quarter percentage point rate rise in August.
A higher-than-expected inflation reading could give a boost to sterling and push it beyond $1.6353, Tuesday's high in early trade, while a hawkish tone to Bank of England minutes, due out on Wednesday, may help it extend those gains. Sterling was up 0.2 percent to $1.6342, having risen to as high as $1.6353, its highest since January 2010. Traders cite option barriers at $1.64 while downside stops are lurking at $1.6285/90.
"Sterling seems to be in an uptrend to me and this morning's data will confirm that inflation is still soaring and we need rate hikes which are moving ever closer," said a London-based spot trader. "Sterling may test $1.6350/60 key resistance but may find a top there before the numbers." Those levels are key since cable has not been able to break above that since January last year.
The pound was slightly higher against the euro, at 87.12 pence. However, the single currency was not far from Friday's four-and-a-half month high of 87.59 pence. The euro has support above its 100-week moving average around 86.74 pence. Technical analysts said a break above Friday's high could see it target the 2010 high of 89.40 pence, but stiff resistance was seen ahead of 90 pence.
Many in the market believe the BoE will raise rates from a record low 0.5 percent as early as May. But it is likely to lag the European Central Bank, which has indicated it could raise rates next month. Some analysts though have pushed back their forecasts for rate hikes following some recent weaker UK data and on uncertainties about the impact of Japan's earthquake and nuclear crisis, as well as events in North Africa and the Middle East.
"A higher CPI means that the BoE will be more likely to hike rates in April," said Hans-Guenter Redeker, chief fx strategist at BNP Paribas. But he added that the market would also await for retail sales data for February, due on Thursday, and a disappointing number could push cable back.