Sterling fell to its lowest in over four years against the euro on Thursday, a day after a dovish Bank of England report reignited speculation of an interest rate cut soon, with more to follow. Such expectations could get a further boost if UK retail sales data, due at 0930 GMT, point to a slowdown in spending.

The BoE's quarterly inflation report, released on Wednesday, showed inflation hitting its 2 percent target in two years' time if rates moved in line with market expectations, which imply two rates cuts from 5.75 percent during 2008.

"I am not surprised by the reaction to the BoE report ... Our view has always been that the BoE was more likely to cut rates before the ECB and that would push euro/sterling higher," said Steve Barrow, currency strategist at Bear Stearns.

He forecasting that the euro could move to 75 pence in the first half of 2008.

The euro rose as high as 71.46 pence, hitting levels last seen in July 2003, having climbed 1.2 percent in the aftermath of the BoE report, posting its biggest one-day percentage gain in 3-1/2 years.

On the BoE's trade-weighted measure, sterling fell to 100.70, its lowest since July 2006.

The pound also hit a three-week low at $2.0507, before recovering to trade at $2.0543 by 0811 GMT.

Consensus is for UK retail sales to be flat on the month, with the annual growth rate slowing to 4.8 percent in October from 6.3 percent in September.

Source Supplied by Reuters