* Graphic: sterling and gilt yields bit.ly/2dgAXn1
* Graphic: World FX rates in 2017 tmsnrt.rs/2egbfVh
* Graphic: Trade-weighted sterling since Brexit vote tmsnrt.rs/2hwV9Hv
By Saikat Chatterjee
LONDON, Nov 24 (Reuters) - Sterling climbed to a near two-month high on Friday as a break of some key technical levels in a holiday-shortened market prompted some traders to rein in their short positions.
With increasing signs of general dollar weakness across the board and growing signs that a way may be found out of a German political deadlock also bolstered the pound.
“The German political stalemate seems to be ending and that is taken as positive by sterling traders as a more fruitful outcome at the EU summit next month is expected - but these moves are taking place in very thin markets,” said Manuel Oliveri, an FX strategist at Credit Agricole in London.
Germany’s Social Democrats bowed to pressure from across the political spectrum on Friday to consider helping Chancellor Angela Merkel form a new government, but pledged that party members would have final say on any deal.
For many sterling traders, the Dec. 13-14 EU summit marks a critical juncture in the process of Britain leaving the bloc, with some market analysts seeing it as a potential make-or-break moment for the pound.
At stake is whether Prime Minister Theresa May can satisfy other EU leaders that Britain has made enough commitments on issues including a financial settlement bill and the Irish border to quickly start trade negotiations next year as the clock ticks down.
European Commission President Jean-Claude Juncker said on Friday that a meeting with May on Dec. 4 would allow the EU to see whether sufficient progress had been made on Brexit.
In a week shortened by holidays in the United States and Japan, the British pound rose 0.4 percent to $1.3357, its highest since Oct. 2.
Sterling also rose 0.4 percent against the Japanese yen and the Swiss franc.
Against the dollar, sterling is flirting with some key chart levels.
If it stays above the $1.3330 line, which it has tried three times to cross over the last few weeks, chartists believe it can quickly advance on late-September highs of $1.3643.
The recent rise in sterling has not been accompanied by a rapid build-up in positions, indicating that investors were still underweight on the British currency.
“We are near some very important technical levels on sterling here,” said John Marley, head of FX strategy at Infinity International, a currency risk management firm.
The dollar hit a five-week low against a basket of currencies, with trade thinned this week due to the North American Thanksgiving holiday on Thursday, which was also a national holiday in Japan. (Reporting by Saikat Chatterjee; Editing by Kevin Liffey)