LONDON: Sterling briefly hit a session low against the dollar on Tuesday as investors sold the pound in a knee-jerk reaction to lower-than-expected UK inflation data that suggested the Bank of England has leeway to keep monetary policy loose for some time. Losses were limited however ahead of U.S. Federal Reserve chairman Ben Bernanke's testimony to Congress on Tuesday and Wednesday that markets will scrutinise for hints that another round of so-called quantitative easing is on its way to bolster the world's largest economy. Despite the inflation data, the pound remained within sight of a near two-week high of $1.5677, hit earlier in the session as sterling extended gains from the previous day when poor U.S. retail sales data added to speculation the Fed may opt for another round of monetary stimulus. Sterling fell to $1.5610 against the dollar from around $1.5630 before the data, before paring losses to last trade steady on the day at $1.5640. Many analysts said falling inflation justified the Bank of England's asset purchases, intended to stimulate lacklustre economic growth, and could see an expansion of the current 375 billion pounds programme. "It seems like this will give the BoE room to manoeuvre. They know they can now buy even more because inflation is finally coming down," said John Hydeskov, chief analyst at Danske Markets. Quantitative easing can be considered currency negative because the bond-buying programme involves pumping more pounds into the system, potentially weighing on demand. UK consumer price inflation fell to 2.4 percent in June, its lowest level since November 2009, and undershooting forecasts for a reading of 2.8 percent. Some analysts said the data should be seen as a positive for the pound in the longer-term, given it could enable consumers to spend more and help lift the UK economy out of recession. "It will feed down into disposable incomes in households which have been decreasing for the last few years, so eventually it will be a good thing for sterling, but not intra-day today," said Danske Bank's Hydeskov. Market players said Bernanke's testimony would have greater impact on the direction of sterling/dollar, also known as cable. "Sterling is holding up well because now attention has turned to the Fed and QE," said Jane Foley, senior currency strategist at Rabobank. "There's a risk if Bernanke is not as dovish as some people expect we will see cable lower again." EURO WEAKNESS The euro rose 0.2 percent against the pound to 78.59 pence, not far off Monday's trough of 78.32 pence which was its lowest since late October 2008. Sterling shrugged off the International Monetary Fund's cut in its UK growth forecasts on Monday and has made steady gains versus the euro since the European Central Bank cut interest rates earlier this month. Many analysts said although sterling could fluctuate against the dollar it was likely to gain further versus the euro. "Sterling/dollar looks likely to be dependant on sentiment towards U.S. growth and sentiment towards the euro. But euro/sterling looks likely to continue lower as the medium-term downtrend remains intact," said Lloyds analysts in a note. Market players were also focused on BoE governor Mervyn King's appearance in front of a Treasury Select Committee. King faced questions about the Libor scandal, although there was little impact on the pound.

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