LONDON (AFX) - Sterling was up in light London trade ahead of the release of unemployment figures for January and the Bank of England inflation report, due out at 9.30 am and 10.30 am respectively, dealers said. Steven Pearson, head of strategy at Halifax Group Treasury said: "There hasn't been a great deal of activity overnight or this morning." "The main event is the inflation report from the BoE. Further references to the imbalance in the UK economy or the perceived overvaluation of sterling could be taken badly," he said. Jane Foley, strategist at Barclays Capital, said: "The market is right to expect that we'll be hiking interest rates, although I don't really think that the January data in itself is a cause for that, it is more to do with the fact that domestic demand is robust." "Sterling is a bit stronger, and one of the reason for that is the market's anticipation that interest rates differentials can really support it against the US dollar," she added. But she warned that the upside in sterling/dollar could prove to be short-lived, particularly as UK interest rates should rise by the same amount as in the US. "But we do not need to see euro/dollar heading downwards again before we see cable moving lower as well," she added. Analysts noted that sterling had outperformed the euro in recent days, with the euro falling close to the 0.61 stg figure. "If sterling can wait for the inflation report quite well, we expect to see a test of the 0.6070 area, which is fairly key support," he added. Unemployment figures are expected to show a slight acceleration in the rate of job losses. The rise in job uncertainty should also keep average earnings under control. Pearson predicted the market will shrug off the unemployment report, and focus on the inflation report. The Bank of England inflation report is expected to chart a modestly higher course for prices than its November edition amid budding signs of increased price pressures. This in turn, will shorten the odds for UK interest rate rises later in the year as a global recovery kicks in, and also reduce the chances of further rate cut hopes. Referring to yesterday's inflation figures, Bank of England's governor Sir Edward George said the rise was "no doubt to some extent erratic". The government has set the Bank of England's Monetary Policy Committee a 2.5 pct target for RPIX over a two year period. George also laid out the hope that rates may be cut if the economy grows weaker than expected and inflation is lower. "We are prepared to reduce interest rates further, just as we stand ready to raise them if the overall economy, and inflation, appear likely to be stronger than we currently anticipate," he said. Meanwhile, the dollar was mixed ahead of the much-awaited retail sales figures for January, due at 1.30 pm. Retail sales have been showing some signs of recovery but observers expect that the auto-sales numbers will continue to be dropping off. This in turn, will provide significant support for the dollar. The euro was a touch weaker against the dollar in thin trading. Analysts said the fact that Germany managed to dodge the European Commission's official warning over its budget deficit was not a good scenario for the unit. "We know that Germany's budget deficit is approaching 3.00 pct of GDP and that it is going to be tough for them to keep it below 3 pct but they probably will do, bearing in mind that this is an election year after all," according to Foley.