LONDON Sterling steadied against the dollar on Tuesday, paring earlier gains made in reaction to higher than expected UK inflation data.
The annual rate of consumer price inflation spiked higher to 2.7 percent in October, wrongfooting many market players who had been expecting a gentler rise to 2.3 percent.
The news prompted some market players to trim bets on the Bank of England pumping more money into the economy, which could weigh on the exchange rate, and helped the pound rally to a session high of $1.5916.
But many strategists said policymakers would be more concerned with supporting UK economic growth than curbing inflation when deciding whether to opt for more monetary easing in future, meaning sterling gains would be limited.
"No one should doubt that if the Bank thinks it needs to print more money to stimulate growth it will not hesitate do so," said Glenn Uniacke, senior dealer at Moneycorp.
"The prospect of further quantitative easing has receded only temporarily, and any boost in sterling will likely be equally brief."
Sterling was last close to flat on the day at $1.5879, hovering near a two-month low of $1.5857 hit earlier in the session.
Traders cited stop-loss buy orders above $1.5940 with near-term support at its 200-day moving average of $1.5850.
"The data must be taken with caution as inflation in the UK has been overshooting the 2 percent target for at least 35 months in a row and has only had a limited impact on the monetary policy outlook," said Audrey Childe-Freeman, head of foreign exchange strategy at BMO Capital Markets.
The euro fell to a session low of 79.70 pence after the inflation figures. It was last trading at 79.95 pence, down 0.1 percent on the day with traders citing hedge funds as the main sellers.
The single currency found some support from a German media report that Greece is likely to receive more than 43 billion euros in fresh aid in one go.
INFLATION REPORT IN FOCUS
The next focus for sterling investors will be the Bank of England's Inflation report on Wednesday, when the bank releases its latest growth and inflation projections.
Peter Kinsella, currency strategist at Commerzbank, said the central bank's governor Mervyn King was likely to sound a cautious note on UK growth despite the economy emerging from recession in the third quarter of this year.
"Upside in UK GDP growth is pretty difficult to see and from that we are going to have to call cable (sterling/dollar) lower. Anything around $1.60 should be a sell," he said.
Kinsella said the difference between year-on-year U.S. and UK GDP growth was around the highest level since the mid-1990s, a factor that should weigh on the pound against the dollar.
(Additional reporting by Annoja Debnath; Editing by Greg Mahlich)