Pound edges lower vs euro

LONDON (Reuters) - The pound edged lower against the euro on Tuesday after hitting its highest level this year in the previous session as the market awaited figures that are expected to show UK inflation falling further.

Data due at 9:30 a.m. are expected to show the annual consumer price index falling to 2.0 percent in May from 2.3 percent the previous month, while the retail price index drops further into negative territory to -1.50 percent year-on-year.

Investors are also mindful that Wednesday's labour market data could serve as a reminder that the economy is not out of the woods just yet.

The pound rose against the dollar, however, with sentiment helped by Britain's biggest retailer Tesco TXCO.L reporting first quarter sales rose by 10 percent. Hotel operator Whitbread (WTB.L) also said group sales rose 2.5 percent over the period.

"In view of the positive bias towards sterling at the moment, those two reports helped to give it a bit of a lift against the dollar," Dublin-based AIB Group Treasury economist Geraldine Concagh said.

The U.S. currency reversed some of the previous day's strong gains across the board, with investors cautious ahead of a summit of leaders from Brazil, Russia, India and China (BRIC).

At 8:53 a.m., sterling rose 0.2 percent against the dollar to $1.6340. The euro gained 0.3 percent to 84.85 pence though it stayed not far from a 2009 low of around 84.45 pence reached on Monday.

Sterling's recent gains versus the single currency reflect the belief that the UK economy is on the road to recovery while the euro zone economy is expected to lag as concerns grow about the health of the region's banking sector.

Many are wary, however, ahead of the UK inflation data, which could concern policymakers at the Bank of England if it falls too steeply.

"With growth bottoming out, CPI releases can no longer be dismissed as an irrelevance for the FX market, and we may see some short-covering position squaring in euro/sterling in the run-up to the release just in case the data springs a dovish surprise," Calyon analyst Daragh Maher said in a note to clients.

Analysts said the underlying positive sentiment on the UK remained, however, with many now believing the economy could return to growth by the end of the year.

The Confederation of British Industry on Monday predicted the economy would stabilise in the fourth quarter of the year, earlier than previous estimates, and that growth would return at the start of 2010.

(Reporting by Jessica Mortimer; editing by Patrick Graham)