(Updates levels, adds quote)
* Sterling softer vs euro after inflation data
* Caution ahead of Wednesday's BoE minutes
* Euro up 0.4 pct vs sterling, stops cited above 81.20/30
By Tricia Wright
LONDON, June 19 (Reuters) - Sterling fell against the euro on Tuesday after UK inflation came in softer than expected, reigniting talk of more easing by the Bank of England and leaving the pound vulnerable to more selling in the near term.
Consumer price inflation fell to 2.8 percent on the year from 3.0 percent in April, its lowest in two and a half years and confounding economists' forecasts for an unchanged number.
Analysts said easing price pressures will be welcomed by the Bank of England's monetary policy committee which faces the dilemma of below-par growth and above-target inflation. Slowing inflation will make it easier for the BoE to ease policy without worrying too much about inflationary pressures.
More quantitative easing is usually considered bearish for the currency as it increases the supply of pounds in the system. Injecting more pounds in the system can also stoke inflation.
"(The CPI) certainly makes more QE a possibility... but we're not seeing a rally in euro/sterling which is what you would expect in the event of the market expecting more forms of QE," said Steven Saywell, head of European FX strategy at BNP Paribas.
"I don't think it's a done deal as far as the Bank of England is concerned, and I think in some ways they'd like to keep their powder dry to see if things really get worse."
The euro advanced 0.4 percent to 80.57 pence, with traders citing stop-loss orders above 81.20-30 pence and resistance seen around the June high of 81.63 pence.
Euro/sterling fell to a 3-1/2 year low of 79.50 pence in mid-May but since then has been stuck in a range between 81.60 pence and 79.50 pence.
Sterling hit a session low of $1.5615 from about $1.5643 just before the data release, but trimmed its losses, and was last trading up 0.2 percent at $1.5695.
FED RESERVE FOLLOWED BY BOE
Traders said the dollar was likely to struggle on expectations that the Federal Reserve could ease policy before the BoE. The Fed starts its two-day meeting on Tuesday, and the potential for further liquidity injection is likely to support riskier assets and sterling.
The dollar index which measures the greenback against a basket of currencies was down 0.42 at 81.611, although any gains by sterling could be fleeting.
Against a background of fresh flare-ups in the debt crisis in the euro zone, the UK's biggest trading partner, some analysts think the BoE could opt for aggressive asset purchases as soon as early next month.
Bank of England governor Mervyn King said in a keynote speech last week that the euro zone was casting a "black cloud" over the UK economy, making a case for more QE. He said the BoE would also provide cheap long-term funding to banks to encourage them to lend to businesses and consumers.
On Wednesday traders will scrutinise minutes from the latest BoE meeting that are expected to give clues on whether policymakers are leaning towards further stimulus.
"More active policy easing from the BoE is likely to continue weighing upon the pound," said Lee Hardman, currency analyst at Bank of Tokyo Mitsubishi.
"Elevated near-term inflation had been acting to restrain the BoE from further easing despite building evidence of economic weakness. It appears that the BoE has now capitulated on that view following Governor King's Mansion House speech." (Editing by Louise Ireland)
