Sterling recouped some of the previous session's sharp losses on Tuesday, strengthening broadly after unexpectedly high British inflation data pushed expectations of a possible Bank of England interest rate cut further into the future.

Consumer prices rose at an annual rate of 2.1 percent in October compared with 1.8 percent in September, above analysts' forecasts for 1.9 percent and the highest level since June.

Sterling had fallen versus the dollar and yen, and hit its lowest in nearly three years against the euro on Monday as risk-averse investors pared back positions in relatively risky carry trades and sold the high-yielding pound.

But the inflation numbers, along with a broad decline in the yen, the fall in the dollar and a recovery in higher-yielding currencies, boosted the pound.


"It's a resumption of the trends we've seen. There was a bit of a fall-out on Monday, but we shouldn't separate out sterling from other currencies and miss the big picture. And that is that people believe the dollar's going to go lower," said Neil Mellor, currency strategist at Bank of New York Mellon.

"The inflation figures can only have helped that process because ... it means the Bank of England doesn't really have a great deal of scope to cut rates," Mellor added.

At 1457 GMT the pound was up 0.9 percent on the day against the dollar at $2.0730, recovering from Monday's two-week low. The euro was down 0.3 percent at 70.47 pence, having hit its highest level since January 2005 a day earlier.

Last week the dollar, plagued by long-running concerns about the health of the U.S. economy and financial institutions, fell to its weakest in more than 26 years against the pound, and struck all-time lows against the euro

But Mellor said the euro could still firm against sterling.

"There's a greater chance of a rate cut in the UK next year than there is in the euro zone. So on the basis of interest rate differentials, I think the euro is going to gain ground."

Economists at UBS expect the BoE's Monetary Policy Committee to remain cautious in the near term against a backdrop of bubbling inflationary pressures and potentially slowing growth.

"(We) see the MPC on hold in the near term and for the first of three rate cuts to happen in February next year," they said in a note.


"This is not a bar to the MPC responding to weak demand growth by cutting interest rates," Goldman Sachs economists said in a note, referring to the October CPI report.

Further insights will follow on Wednesday when the Bank of England presents its Inflation Report.