LONDON, May 14 (Reuters) - Sterling rose to a 16-month high against the euro on Wednesday, extending recent gains before an inflation report from the Bank of England that could set the stage for UK monetary tightening in coming months.
Labour market data is also due on Wednesday, at 0830 GMT an hour before the inflation report, and both sets of figures could potentially provide strong signals on the timing of an expected rise in interest rates.
Some analysts are beginning to speculate a first hike could come in late 2014 rather than early next year.
The euro was 0.1 percent lower against the pound at 81.33 pence, its lowest since January 2013. Sterling was also firm against the dollar at $1.6870, with bulls eyeing the near five-year high of $1.6997 struck last week.
Many analysts expect the BoE to start its tightening cycle before the other major global central banks.
"We hold a bullish view for the pound at present and expect the market's view of the BoE being first to raise its official interest rate to be reinforced by the quarterly inflation report and the press conference by Governor (Mark) Carney," said Derek Halpenny, European head of global markets research at Bank of Tokyo Mitsubishi.
Sterling's trade-weighted index traded near a 5 1/2 year high OF 86.9.
The euro was also hurt by a media report on Tuesday that the Bundesbank was ready to back a raft of stimulus measures for the euro zone economy if the European Central Bank cuts its own inflation forecasts next week.
That bolstered expectations of policy easing by the European Central Bank next month. Reuters on Wednesday quoted sources as saying the ECB is preparing a package of policy options for its June meeting, including cuts in all its interest rates and targeted measures aimed at boosting lending to small- and mid-sized firms.
The difference in the monetary policy outlooks in the UK and the euro zone has helped push the yield premium offered by two-year British gilts over euro zone bonds to its widest since 2008. This too has helped the pound, traders said. (Reporting by Anirban Nag; Editing by John Stonestreet)