Sterling hits 3-wk high after robust UK data, Yellen speech

(Recasts, adds Yellen's speech)

By Anirban Nag

LONDON, Aug 26 (Reuters) - Sterling hit a three-week high against the dollar on Friday, supported by solid UK growth and business investment data and after Federal Reserve chair Janet Yellen gave no firm indication that the central bank would raise interest rates next month.

She (Munich: SOQ.MU - news) did, however, say that the case for rate rises had strengthened, echoing comments from other senior Federal Reserve officials including William Dudley and Stanley Fischer.

Federal fund futures indicated a slightly lesser chance of a U.S (Other OTC: UBGXF - news) . rate hike in September, according to the CME Fedwatch, leading to a drop in the dollar.

The pound jumped to a three-week high of $1.3280, having fallen to a day's low of $1.3143 immediately after Yellen's speech was released. It was on course for 1.2 percent weekly rise, its second straight week of gains.

Against the euro, sterling was up 0.2 percent at 85.35 pence per euro. The pound was on track for its best weekly performance in six weeks against the single currency , having hit a two-week high on Wednesday.

"Markets had been half-expecting some hawkish noises around a possible September rate hike but it looks like the Fed chair is playing it cautious," said Neil Wilson, market analyst at ETX Capital (Other OTC: CGHC - news) .

"Sterling/dollar is seeing a strong bid, its strongest since the Bank of England cut rates at the start of August. Whatever Yellen is saying is playing well with the pound."

Earlier, data released on Friday showed British gross domestic product rose by 0.6 percent in the second quarter and was up by 2.2 percent compared with the same period last year, in line with preliminary readings and forecasts.

Business investment unexpectedly rose between April and June - a period which mostly covered the run-up to the vote on June 23 - compared with the previous three months.

"UK data continues to stifle the scaremongers," said Alex Lydall (NYSE: LDL - news) , senior sales trader at Foenix Partners, a firm which offers hedging solutions to British companies.

"While this data-set is clearly not post-Brexit itself, solid figures running into the referendum and also strong business investment figures suggests the whole debacle perhaps wasn't as bad as previously thought around the month of June."

Sterling rose 1.2 percent against the dollar last week after July inflation and retail sales numbers beat forecasts, adding to signs that consumers have yet to rein in spending after the Brexit vote.

The recent slew of upbeat data helped sterling stay clear of a three-decade low of $1.2798 struck on July 8. The pound had been under pressure earlier this month on expectations that the Bank of England might have to ease monetary policy further in coming months.

The central bank cut rates to a record low on Aug. 4 and restarted an asset-buying programme to cushion the economy from an expected post-Brexit slowdown. But after the recent data, some investors are reassessing the chances of further easing.

Gilt futures jumped some 20 ticks after an initial fall. They last stood up 20 ticks on the day at 132.53. (additional reporting by Ana Nicolaci de Costa; Editing by Toby Chopra and Richard Balmforth)