The pound came under pressure after an unexpected slump in UK retail sales at the start of the year put the possibility of a Bank of England rate cut back in the picture. Expectations had receded yesterday when the central bank published a set of rather upbeat forecasts for inflation and growth This morning's data however, was a far cry from those projections and suggest that GDP growth this year may well fall short of expectations, thus paving the way for interest rate cuts. Official data showed retail sales fell 1.3 pct in January from December, well below analysts' forecasts for no change and the biggest drop since December 2004 On an annual basis, sales were up just 1.3 pct, again way below expectations of a 3.1 pct increase. "Given the extremely weak data this morning, sterling has fallen quite sharply on the back of it," said HBOS currency analyst Naeem Wahid, adding that the pound is generally very sensitive to data releases But he cautioned against too much pessimism on the pound as it may be too soon to say that interest rate cuts are on the way. Yesterday's Bank of England Inflation Report "made it fairly clear" that interest rates would be on hold for the time being, and it will take evidence of a sustained fall in sales over the next couple of months for there to be any implications for the next Inflation Report, he added Nevertheless, the news will dash any hopes of a revival in the troubled retail sector following a better performance over the Christmas period. The falls were across the board, with only non-store retailing sales flat on the month. "The fact that the fall was driven by a relatively broad-based drop in all sectors rather than a specific pay-back in household goods is arguably a little more worrying," said CALYON analyst Henrik Gullberg Elsewhere, the dollar drifted higher ahead of some key US data today, having been bolstered somewhat after US Fed chief Ben Bernanke signalled yesterday that interest rates in the country will have to rise further. Bernanke indicated in his maiden testimony to Congress yesterday that upcoming data will be crucial for the prospect of interest rates -- thus giving added importance to the indicators due out today "The implications are that volatility in the interest rate market is likely to be very high should economic data slow in the time leading up to the next FOMC meeting, as our US economists expect," said Mansoor Mohi-uddin at UBS. US data releases today include jobless claims where further falls are predicted and the Philadelphia Fed PMI where a bounce in the headline index is expected. Also due out today are data on housing starts and permits "Any significant weakness in the housing data would be dollar negative suggestive of a slowing economy, thus reducing the amount of monetary tightening required from the Fed," said Steve Pearson at HBOS.