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* Graphic: sterling and gilt yields bit.ly/2dgAXn1
* Graphic: World FX rates in 2016 tmsnrt.rs/2egbfVh
* Graphic: Trade-weighted sterling index tmsnrt.rs/2hwV9Hv
By John Geddie
LONDON, Dec 19 (Reuters) - Britain's pound steadied from two straight weeks of losses against the U.S. dollar on Monday after further hints the government is looking at ways to smooth its exit process with the European Union.
Trade minister Liam Fox said on Sunday Britain may need a transitional agreement to bridge the gap for businesses during negotiations with the EU, but it should not "buy back" into too many of the bloc's regulations.
Prime Minister Theresa May first hinted at the idea - which has since been backed by finance minister Philip Hammond - last month. May is due to make a statement to parliament on last week's EU summit at 1530 GMT.
"We are seeing a more emollient tone from certain politicians like Liam Fox," Michael Hewson, markets analyst at CMC Markets, said.
"Concerns about a hard Brexit are not as front of mind as they were a couple of months ago and market positioning is probably more supportive of the pound as we head into the year end."
The latest data from the Commodity Futures Trading Commission showed investors continued to reduce bets against sterling, with net shorts at their smallest since the third week of September.
Sterling edged up against the dollar to $1.2490, having last week ceded ground against a greenback bolstered by the prospect of faster-than-expected U.S. interest rate rises next year.
The pound was broadly flat against the euro at 83.76 pence but remained within sight of a five-month high hit at the start of the month.
"December can be a dangerous month and sterling remains very sensitive to political events," said Simon Derrick, head of currency research at Bank of New York Mellon.
"But sterling is not alone in facing political risks and it makes sense that short positions would be coming off."
With May not invited to a meeting between the other 27 EU national leaders after last week's summit, it is unclear what sort of feedback on the process the prime minister will be able to offer parliament on Monday.
She might be further pressed on media reports, quoting the EU's envoy, that it would take up to 10 years for Britain to negotiate a new trade deal with the EU. (Editing by Jeremy Gaunt)