Sterling matched a recent three-week high against the euro on Tuesday after data showed British inflation came in stronger than expected in May, fuelling talk of a Bank of England interest rate rise this year.
Consumer prices rose 0.5 percent on the month in May, taking the annual inflation rate to 2.2 percent, above the BoE's 2.0 percent target for the first time in six months.
"The bias now is definitely toward a rise (in rates) rather than a cut this year, which should support sterling but it could be vulnerable to weak data," said Kamal Sharma, currency strategist at Bank of America.
By 1500 GMT, the pound was little changed against the euro at 68.38 pence after matching Monday's three-week high of 68.21 pence on the inflation data. Sterling was up slightly at $1.8423 after rising to the day's highs of $1.8457 after the inflation data. Sterling also hit the year's highs against an ailing yen at 212.08 yen.
BoE Governor Mervyn King said late on Monday the economic outlook was not clear and financial market turmoil over the last month had highlighted the many risks to the Monetary Policy Committee's relatively benign forecasts for growth and inflation.
"The headline inflation is on the strong side of expectations and consistent with the more hawkish tone we had from King last night," said Audrey Childe-Freeman, European economist at CIBC World Markets.
"It will keep rate hike talk in place in the UK and that's supportive for sterling." British interest rates stand at 4.5 percent. For more clues on the health of the British economy, investors will look to labour market data on Wednesday.
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