Sterling slipped against the euro on Friday, extending its retreat from a two-week high set a session earlier as investors pared some bets against the euro ahead of the weekend.

The pound also lost ground versus the dollar as the greenback steadied from Thursday's fall sparked by comments from Federal Reserve Chairman Ben Bernanke, which cemented expectations of further U.S. interest rate cuts.

"The favourite trade of the market recently has been to look for some strength in the pound against the euro and obviously we got down yesterday to the 74 pence area, so we could be seeing a little bit of profit taking on those trades," said Steve Barrow, currency strategist at Bear Stearns.

"There had been quite a lot of interest in buying sterling off the back of what was perceived to be a fairly hawkish report from the bank," he added, referring to the Bank of England's quarterly inflation report released on Wednesday.

The BoE, worried about rising inflationary pressure, signalled that rates won't fall as sharply this year as financial markets have been predicting, although at least one more cut in borrowing costs is still probably on the cards.

Markets, however, are still expecting at least three more rate cuts from the current 5.25 percent FSSZ8.

At 0849 GMT, the euro was up 0.3 percent at 74.54 pence, off the two-week low of about 74.03 pence plumbed on Thursday. Sterling was down 0.2 percent against the dollar at $1.9646 after losing grip of Thursday's 1-1/2 week peak around $1.9738.

Commerzbank analysts said the pound was approaching tough resistance at $1.9736, its 3-month resistance line, which is reinforced by the 50-day moving average at $1.9793.

"We view this area will hold and prompt failure for a slide back down to ultimate test last week's low of $1.9396 near term, ahead of the market challenging key support at $1.9289-$1.9335, trendline support and previous Jan 22 low shorter term," they said in a report.

The economic data diary is pretty empty until next week when UK's retail sales for January and minutes of the Bank of England's Feb 6-7 monetary policy meeting will feature.

Sourced by Reuters.