* 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 Jemima Kelly
LONDON, Dec 20 (Reuters) - Sterling edged up against the dollar and euro in a quiet day of trading on Wednesday, with investors cautious about taking on large new positions on the currency ahead of the Christmas holiday and phase two of the Brexit talks next year.
With thin trading and little economic data to shift interest elsewhere, focus on the next round of divorce negotiations between Britain and the European Union left the pound unable to break outside of the ranges it has traded in over the past two weeks despite some progress in Brexit talks.
Prime Minister Theresa May last week secured a deal to move negotiations to the next stage, so that post-Brexit trade and a transition arrangement can be discussed.
She told her cabinet on Tuesday that Britain’s objective in leaving the EU should be a deal that enables it to set rules suited to its situation.
The BBC reported on Wednesday that the Bank of England will allow European banks to continue selling their services in the United Kingdom without having to create expensive subsidiaries after Britain leaves the EU, giving sterling some marginal support.
“That’s great, but of course the more important question is whether UK banks will be able to operate on the continent under existing rules, and the answer is no,” said ACLS Global strategist Marshall Gittler.
“While I think sterling may recover slightly into the year-end, all the optimistic talk can’t cover up the inherent impossibility of the contradictory wishes of the British side. I think sterling is still a long-term short,” he added.
Sterling edged up 0.2 percent on the day to $1.3406 . Against the euro, it inched up 0.1 percent to 88.37 pence.
Earlier on Wednesday, a survey showing fewer British employers plan to hire extra staff next year due to one of the gloomiest economic outlooks since the vote for Brexit in June 2016 had little impact on the pound.
Bank of England Governor Mark Carney will later be appearing in front of the Treasury Select Committee in his role as part of the Financial Stability Committee, and the recent financial stability report which oversaw the latest round of UK bank stress tests.
“It seems likely that the Bank of England governor will face further questions about the state of UK household finances as well as the impact on UK banks of various Brexit scenarios, and to what level of detail the Bank has modelled a specific ‘hard Brexit’ scenario,” said CMC Markets analyst Michael Hewson.