* 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 (Adds new comment, details, updates prices)
By Fanny Potkin and Jemima Kelly
LONDON, Oct 13 (Reuters) - Britain’s pound hit an 11-day high in a volatile day of trading on Friday and was heading for its best week in four, benefiting from a weaker dollar as well as signs that Britain is to be offered a two-year Brexit transition deal.
Sterling has been on a rollercoaster ride in the past two weeks, last week suffering its worst week in a year on domestic political and economic worries, and this week see-sawing on reports that have offered conflicting accounts of progress made in divorce talks between Britain and the European Union.
The pound dropped almost half a cent against the dollar in a minute in morning trade in London on Friday, after a German government spokesperson warned “time is running out” for Britain to negotiate the deal it wants.
But not long after, it recovered some ground after a spokeswoman for British Prime Minister Theresa May said she would have “more to say” on the Brexit financial settlement at next week’s EU summit.
Sterling had flip-flopped on Thursday, too, falling sharply after the EU’s chief Brexit negotiator Michel Barnier told reporters that talks around Britain’s divorce payment had hit an “impasse”, and then shooting up after a report the bloc could offer a two-year transitional Brexit deal.
“The pound remains highly sensitive to political events,” wrote Rabobank strategists in a note to clients.
“Yesterday’s brief sterling sell-off highlights the concern that is embedded in the market regarding the possibly of no deal being in place in March 2019. It also suggests that investors are deeply concerned about Prime Minister (Theresa) May’s position that ‘no deal is better than a bad deal’.”
Sterling added to its earlier gains after data showed underlying U.S. inflation remained muted, knocking the dollar down across the board and sending the pound to as high as $1.3323, its strongest since Oct. 2.
By 1544 GMT, it has eased back to $1.3295, still up 0.2 percent on the day.
Market-watchers are warning that the outlook remains fragile due to worries about the future of Brexit negotiations, as well as infighting in the Conservative government.
“There’s a lot that can go wrong and it’s not taking into account what’s going on in UK politics,” said Adam Cole, head of FX strategy at RBC, who is advising to sell into the rallies.
Against the euro, sterling strengthened to a 9-day high of 88.765 pence. (Reporting by Fanny Potkin; Editing by Jemima Kelly and Alison Williams)