Sterling bounces from 14-month low against weakened euro

By Jemima Kelly and Patrick Graham

LONDON, Feb 12 (Reuters) - Sterling recovered from a 14-month low against the euro on Friday, helped by an end of week consolidation of many of the safety-first trades that have dominated global financial markets since the start of February.

The pound has tumbled about 10 percent against the euro since the start of December as pricing for a rise in Bank of England interest rates was pushed back from late 2016 to the end of the decade.

In the context of this week's at times frantic selling on stock markets, investors are now pricing in a 50-percent chance the bank will have to cut rates in the next year and that, along with the prospect of months of uncertainty linked to the referendum on a "Brexit" from the EU, has kept trading choppy.

A number of banks, however, have suggested a deal at next week's EU summit that allows Prime Minister David Cameron to launch an aggressive campaign to stay in the 28-country bloc has the potential to turn sentiment more positive on the pound.

"Next (EUREX: NXTI.EX - news) week could be really pivotal," BNP Paribas (Xetra: 887771 - news) currency strategist, Sam Lynton-Brown, said.

"We have a lot of data and the EU summit against a backdrop of some very bearish positioning on sterling. If Cameron is able to declare a victory, announce a June referendum and then begin campaigning to stay in, that will be a boost."

Against the dollar, sterling was 0.2 percent lower at $1.4447. It gained about 0.6 percent to 77.76 pence per euro, having weakened to 78.975 pence on Thursday. Sterling's trade-weighted index edged up to 87.1, having hit a 15-month low of 86.5.

Falling bank stocks in Britain and elsewhere in Europe have also dampened demand for sterling this week. A huge banking and financial sector helps to plug the Britain's current account gap, and any risks to the sector weigh on the pound.

Some banks predict falls of up to 20 percent in sterling's value if Britons vote to leave the EU but the most central scenario remains the status quo. The shape of the deal Cameron emerges with from next week's summit will be important, they say.

"We think quite a lot of weakness has been priced in sterling to reflect the risks from the referendum, and we think if Cameron comes back with some sort of a win, there is scope for sterling to correct (higher)," Barclays (LSE: BARC.L - news) currency strategist, Nikolaos Sgouropoulos, said.

"We've gone too far in euro/sterling in the near time," he said. "Today I don't see any particular catalyst apart from the fact that the market is taking profits on most of the positions." (Editing by Louise Ireland)