Sterling edged up versus the euro and the dollar on Tuesday, as investors shrugged off weak UK retail sales data and squared positions in the oversold pound ahead of a Bank of England rate decision later this week. Markets are split on whether the BoE will cut rates from 5.50 percent on Thursday, or whether it will opt to wait until February. Overall though, short sterling futures FSSZ8 are pricing in 100 basis points worth of rate cuts by end-2008.

In the first few days of the year, such expectations have sent the pound to 4-1/2 month lows versus the dollar, 1-1/2 year lows versus the yen and record troughs against the euro.

Analysts said that left sterling oversold and vulnerable to a bit of a correction, even though data from the British Retail Consortium on Tuesday showed December retail sales growing at their slowest pace since March 2006.

"The weakness is fairly well discounted already. And also retail sales are only about 35 percent of consumer spending and the BRC figures will be a tiny proportion of that, so that's possibly why the market is not reacting too much," said David Pais, currency strategist at Citi.

"Our own view is that they (the BoE) will probably wait until the February meeting, and then cut in the context of the inflation report, but we certainly see further downside for sterling and UK yields from here." By 0805 GMT, the pound was up 0.6 percent at $1.9806, about 1-1/2 cents above the previous day's 4-1/2 month lows.

The euro fell half a percent to 74.23 pence, retreating from record highs at 74.93 set at the end of last week.

But RBC Capital Markets said the risks to the pound remained to the downside, and recommended selling it on any rallies.

"The very weak December BRC retail sales headline ... (is) supporting the increasing -- though non-consensus -- chorus calling for a BOE rate cut this week," RBC said in a note.

Source Supplied by Reuters.