(Reuters) - Sterling fell against a firmer dollar on Tuesday as U.S. senators signalled they were close to a deal to reopen the U.S. government and avert an immediate debt default. The pound rose earlier after British inflation data came in slightly higher than expected which lent some support to the view that the Bank of England would hold off pumping in more stimulus into the economy. The Office for National Statistics said annual consumer price inflation was 2.7 percent in September, unchanged from August, confounding economists' forecasts for a slight dip to 2.6 percent. Sterling retreated against the dollar, which was supported by news that U.S. Senate Majority Leader Harry Reid, a Democrat, and his Republican counterpart, Mitch McConnell, ended a day of talks on a positive note, suggesting a possible breakthrough in a month long battle over government spending . Sterling was down 0.2 percent $1.5955, having risen to as high as $1.6010 after the data. It remained well below its October 1 peak of $1.6260. "Inflation didn't fall as expected and that certainly puts BoE quantitative easing even further on the back-burner, which should be sterling positive," said Kathleen Brooks, research director at FOREX.com. "But investors will be weighing that up with the risk that if we get a confirmed deal from the U.S., that could cause a relief rally in the dollar, so traders are a little bit wary around these $1.60 levels." The euro was down 0.2 percent against the pound at 84.96 pence, inching away from the six-week high of 85.10 pence struck on Friday. After the inflation figures focus will shift to unemployment data for August on Wednesday. This is forecast to show a steady jobless rate of 7.7 percent. The Bank of England says it will keep interest rates low until unemployment falls to 7 percent, a level it sees the British economy as unlikely to reach in the next three years, but a lower unemployment rate could cause markets to price in an earlier rate rise. "Markets are a lot more sensitive to the unemployment figures. If we see a nudge lower in the data then sterling could react positively as it would cause the markets to reassess when the 7 percent threshold would be met," said Simon Smith, head of research at FxPro. But British data in recent days has fallen short of forecasts, causing investors to question the strength of the economic recovery and weighing on the pound. A steady flow of forecast-beating numbers lifted sterling nearly eight percent against the dollar between early August and early October. Since then, it has drifted lower and analysts cautioned that the pound would struggle to make any significant gains from here.

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