Sterling steadies after European banking storm

(Refiles to change headline to European)

By Patrick Graham

LONDON, Feb 9 (Reuters) - Sterling inched higher against the euro and the dollar on Tuesday, a day after sinking to a 13-month low against the single currency on concerns about Europe's financial sector, a key British industry.

The BRC measure of retail sales offered some support for a currency battered since December by concerns over the coming referendum on European Union membership. Sales picked up unexpectedly with a 2.6 percent rise on the year in January.

A bigger than expected tightening of the trade deficit did little to shift the belief that Britain's 10 billion pound a month shortfall and high borrowing needs make it among the most exposed to another global market crunch.

"When there is global illiquidity, it is going to be more difficult to fund the deficit," said Hans Redeker, Morgan Stanley (Shenzhen: 002588.SZ - news) 's head of currency strategy. "So in the UK we have a choice of either higher yields or a lower sterling, and in the current environment it is clearly going to be a weaker sterling."

He said the pound was benefitting on Tuesday from expectations of an accommodative statement on U.S (Other OTC: UBGXF - news) . interest rates from Federal Reserve chair Janet Yellen on Wednesday.

Britain's top share index joined other global indices, dropping to its lowest level in over two weeks on Monday, weighed down by banking stocks which hit multi-year lows. Markets were steadier across the board on Tuesday.

The pound gained just over 0.1 percent to 77.49 pence against the euro, still within sight of lows of 77.85 pence hit in Asian time.

It was also marginally higher on the day against the dollar at $1.4448, more than two cents down on the one-month high of $1.4672 it hit last Thursday after Bank of England chief Mark Carney quashed talk that interest rates could be cut in the coming months.

Data from the Commodity Futures Trading Commission released on Friday showed speculators had trimmed their net bets against the pound last week. They had been adding to their unfavourable bets since the start of the year, pushing the pound to a seven-year low in late January.

"The pound remains on the back-foot despite a less dovish than expected inflation report and an until now softer dollar," Citi analysts said in a morning note.

"The market still has room to sell, especially should concerns of the referendum, muted cyclical performance and tighter financial conditions persist." (Editing by Jeremy Gaunt)