Sterling strengthened versus the dollar and euro on Monday as investors covered short positions after heavy sterling selling the previous session.

The pound fell sharply on Friday after weak data reinforced investor expectations that the Bank of England is set to cut interest rates when it meets this week. Investors booked some of those profits on Monday.

"There's been short covering and the pound has retraced about half of its fall on Friday," said Adam Cole, global head of FX strategy at RBC Capital Markets.

At 0828 GMT, the pound was up half a percent at $1.9753. The euro was down 0.25 percent at 75.10 pence.

However, the pound has fallen by more than 2 percent over the last month against the euro and Goldman Sachs noted that sterling has fallen more sharply than in any quarter since it dropped out of the ERM in 1992.

"Conditions in wholesale credit markets remain very difficult, retail interest rates facing the private sector are still high and, led by falling investment spending, we continue to expect a significant decline in whole-economy growth in 2008," the bank said in a research note.

"Our central view remains for the MPC to reduce official interest rates by 25bp in February and a further 75bp by the end of this year," it said.

Sourced by Reuters.