Sterling eased towards a 2-1/2 month low versus the dollar on Tuesday, with investors speculating that even a strong inflation release later in the day would not necessarily prevent more interest rate cuts in early 2008. UK consumer price inflation, due at 0930 GMT, is expected to rise to an annual 2.2 percent in November from 2.1 percent in October -- moving further above the Bank of England's 2 percent target. But this is far below the series peak of 3.1 percent set in March this year. Analysts said it may not prevent the BoE -- which targets inflation on a two-year horizon -- from following up this month's rate cut to 5.50 percent with another in February.

"The inflation numbers are generally surprising on the upside ... but that means as well that the growth of the British economy is going to move below trend. I would say a good trading strategy is to sell sterling into any strength," said Hans-Guenter Redeker, chief FX strategist at BNP Paribas.

"The overwhelming fundamental news is still very negative (for sterling): we have seen that the housing market is very weak, we know that retailers are cutting prices in the pre-Christmas shopping season."

By 0806 GMT, sterling was down 0.1 percent at $2.0189, edging down towards the previous day's 2-1/2 month lows of $2.0099.The euro was steady at 71.19 pence.

Analysts said markets would remain jittery, as volumes drop before the year-end.

Risk aversion remains key as investors debate the success of the major central banks' measures to boost liquidity in money markets. Under the scheme, the BoE will auction a total of 11.35 billion pounds in two auctions, with the first on Tuesday.

Source Supplied by Reuters.