* 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 (Updates prices, adds new comment)
By Ritvik Carvalho and Jemima Kelly
LONDON, Sept 27 (Reuters) - Sterling touched a 10-week high against the euro on Wednesday, lifted by data showing British retail sales growth hit a two-year peak during the first part of this month, which bolstered bets on a Bank of England rate hike in November.
The pound also hit its lowest levels in over a week against a broadly stronger dollar after the U.S. Federal Reserve Chair Janet Yellen said the previous day that the central bank should continue gradual rate hikes and that it would be “imprudent” to wait until consumer price growth had reached the bank’s target of 2 percent.
The dollar hit its highest in five weeks against a basket of currencies. The pound fell as much as 0.7 percent to $1.3364 in early London trade, its weakest since Aug. 14.
Despite edging up after the UK data, sterling had fallen as much as half a percent to $1.3394 by 1615 GMT. Against the euro, it had strengthened to as much as 87.47 pence, its strongest since July 17. But it also lost ground to the single currency by afternoon, trading flat at 87.67 pence.
The Confederation of British Industry (CBI) said its retail sales balance jumped to +42 in September from a reading of -10 in August, the highest since September 2015 and far above all forecasts in a Reuters poll of economists.
“This week by and large (sterling is) being pushed and pulled by the dollar on one hand and the euro on the other,” said Societe Generale currency strategist Alvin Tan.
Sterling had rallied almost 6 percent against the dollar earlier this month to a 15-month high above $1.3650, on rising expectations the Bank of England will raise interest rates in November. But it came under pressure this week as predictions of a U.S. hike prompted investors to cut short dollar bets.
Uncertainty over the direction of Brexit negotiations - which recommenced this week in Brussels - also continues to weigh on the pound, which has fallen more than 10 percent against the dollar since before Britain’s June 2016 referendum on European Union membership.
“It doesn’t look like there’s been a huge substantive advance in the negotiations since (British Prime Minister) Theresa May’s speech (on Friday), so I don’t think that’s having an impact on sterling at all in recent days,” Tan said.
Many market watchers remain sceptical about the British economy’s ability to stomach an interest rate increase, and traders say hawkish rhetoric from policymakers will have to be matched by an underlying improvement in data to radically change expectations.
“In view of unquantifiable Brexit risks coupled with a slowing economy and burgeoning household debt, it is our contention that... limits (to sterling strength) cannot lie too far above current spot rates,” BNY Mellon currency strategists wrote in a note to clients. (Reporting by Ritvik Carvalho and Jemima Kelly, additional reporting by Saikat Chatterjee; Editing by Mark Heinrich)