Sterling slipped against the euro on Tuesday, with the single European currency gaining broadly as the market took the view its recent sell-off had gone far enough for now. Traders cited a squeeze of short euro positions established as the currency tumbled on concern over the fiscal health of Greece and other peripheral eurozone economies.
Some analysts said the euro's battering over recent weeks may have gone too far and that the currency was oversold. "We are seeing a lightening of euro shorts as the market awaits developments from today's Ecofin meeting. The euro is also gaining due to slightly better risk appetite and it feels like it may have based versus sterling for now, " said RBS currency strategist Paul Robson.
At 1346 GMT sterling had slipped around 0.6 percent versus the euro to trade at 87.33 pence. It was marginally stronger against the dollar, trading up 0.2 percent at $1.5685. The pound had initially risen slightly after UK CPI for January came in as forecast at 3.5 percent, well above the government's 2.0 percent inflation target.
"We are not especially fazed by the jump in inflation this month. There are clearly special factors involved and wage growth remains very restrained," said Investec chief economist Philip Shaw, explaining the lack of market reaction. Bank of England Governor Mervyn King sent an open letter to Chancellor Alistair Darling, as he must any time CPI exceeds the government's target by more than one percentage point.
As had been widely forecast, King reiterated what he had said in last week's BoE inflation report - that the surge in inflation would be temporary and price pressures would subside later in the year. King said January's rise in inflation had been driven by the reversal of a cut in value-added tax, higher oil prices and pass-through from the weaker pound.
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