RTRS:Sterling steady before BOE inflation report, lags euro
* Investors cautious ahead of BOE inflation report
* Sterling off recent lows against USD, drops vs euro
Feb 15 (Reuters) - Sterling held above recent lows against the dollar on Wednesday, bolstered by better risk sentiment although most investors were cautious ahead of the Bank of England's latest inflation report which could highlight risks to UK economic growth.
Most analysts expect the bank to project an undershoot of its 2 percent inflation target in the medium term, keeping alive chances of it injecting further funds into the economy through its bond-buying program, known as quantitative easing.
However, there is a chance that it could leave open the option of tapering off or halting more easing in May, depending on how domestic data evolves over the next few months.
Recent domestic data has raised hopes that UK may skirt a recession and any hint from the BOE that more monetary easing is unlikely could give the pound a boost in the near term.
Sterling was up 0.1 percent against the dollar at $1.5695. It dropped to $1.5644 on Tuesday, its lowest level since Jan. 27, after Moody's put UK's prized triple-A credit rating on review. Traders cited offers at $1.5750 and $1.5770 with option expiries at $1.5800.
"As far as the BOE outlook is concerned, we will be monitoring the forthcoming data and assess whether the recent run of decent numbers in the UK can be sustained or not," said Audrey Childe-Freeman, EMEA head of currency strategy at JP Morgan Private Bank.
"If it can, then we will clearly be moving away from the QE psychology and at the margin, this is supportive for sterling."
The euro was 0.2 percent higher at 83.85 pence, with the common currency supported by comments from China's central bank governor who said the country would continue to invest in euro zone debt and that it remained confident on the single currency.
Hopes remain that a deal to stave off a Greek default will be struck although many were wary given a string of delays. Traders cited stops above 84.10 pence in the euro/sterling cross, with bids said to be at 83.50/60 pence.
Analysts say given UK's high exposure to the euro zone, sterling's gains would be muted against the dollar and as such many do remain bearish about its prospects in the months ahead.
Westpac's Sean Callow said growth prospects in the UK are unlikely to improve and as such the BOE may not raise its bank rate any sooner than the Fed lifts its funds rate. He expected sterling to fall against the higher-yielding Australian dollar in the month ahead to A$1.45 from around A$1.4600.
The market will also eye UK unemployment report due at 0930 GMT.
Data on Tuesday showed UK consumer price inflation falling sharply to 3.6 percent in January. However, analysts warned the drop was partly due to last year's VAT rise falling out of the index, and inflation could be stickier later in the year. (Reporting by Anirban Nag; Editing by)
