Sterling rose against the euro on Thursday as the single European currency slid broadly, helping pull the pound away from a near record low hit the previous day.

The pound also climbed against the dollar, but analysts said the British currency would stay weak after the Bank of England underlined further downward risks to sterling and as futures markets price in a high chance of a UK rate cut next month.

Analysts say current sterling/dollar levels are overbought, given weakness in the British housing market and the overall economy.

Futures markets expect the BoE to cut borrowing costs from 5.25 percent next month, but U.S. interest rates have been cut much more aggressively.

"Sterling remains overvalued (against the dollar), and we're also only just beginning to see the downturn in UK housing and the economy, said Neil Mellor, currency strategist at Bank of New York Mellon. "There's more downside to come."

The euro fell nearly 0.7 percent to 78.35 pence by 0911 GMT <EURGBP=>, having earlier touched an intraday high of 79.00 pence earlier in the day to close in on a record high 79.12 pence last week.

The pound climbed 0.2 percent against the dollar to $2.0112 <GBP=>. The currency hit its highest this year at $2.0397 earlier this month.

BoE Governor Mervyn King on Wednesday said inflation would rise to around 3 percent, but added that the credit crunch meant the bank was more predisposed to cutting interest rates, which would trim the currency's yield advantage.

The European Central Bank has given no indication yet that it is ready to ease monetary policy.

Market participants say sterling would also head lower as concerns about the size of Britain's current account deficit might prompt investors to dump the unit.

UK retail sales data due at 1100 GMT may offer more hints into the health of the British economy. March figures from the Confederation of British Industry are forecast to show a reported sales balance at -5.0, compared with -3.0 last month.

Sourced by Reuters.