Sterling slips but closes off a strong week as Brexit fears ebb

(Updates prices, adds quote)

By Jamie McGeever

LONDON, May 27 (Reuters) - Sterling fell on Friday as traders cashed in on a recent rise in the currency built on the growing belief that Britons will vote to remain in the European Union at next month's referendum, thereby avoiding market volatility that would damage the pound.

A series of polls this week has pointed to the "Remain" camp opening up a lead over those favouring Brexit, lifting the pound to a three and a half-month high against the euro and a three-week high against the dollar.

Sterling rose for the third week in a row on a trade-weighted basis, and is up six of the last seven weeks. There were no new Brexit polls or major UK economic releases on Friday and UK markets will be closed on Monday for a public holiday.

Despite the growing conviction in financial markets that Brexit will be avoided at the June 23 vote, traders are taking no chances and are hedging their bets via options. The cost of hedging against swings in sterling over the next month inched up to a fresh seven-year high.

"This week showed further signs that Brexit concerns have eased in financial markets, and the pound once again outperformed all other G10 currencies," Danske Bank (LSE: 0NVC.L - news) analysts wrote in a note to clients on Friday.

Sterling slipped 0.2 percent against the dollar on Friday to $1.4640, while the euro weakened 0.2 percent to 76.15 pence.

One-month implied volatility on sterling/dollar options edged up to 16.3 percent, the highest since March 2009.

Sterling's recent rebound ran out of steam as this week drew to a close, as traders took profit ahead of a key, long-term technical resistance level at $1.4764. That's the 200-day moving average, which sterling hasn't traded above since November.

Worries about Brexit drove the pound down 11 percent on a trade-weighted basis between mid-November and early April, when it hit a 2-1/2-year low. But it has since recovered around half of that as investors have priced out chances of an interest rate cut that some were factoring in if Britain opted to leave.

"The chance of the UK voting to stay in the EU on 23 June has increased. We thus reduce our risk of a Brexit to 30 percent from 35 percent," said Kallum Pickering, senior UK economist at Berenberg Bank.

On the data front, the Office for National Statistics on Thursday confirmed the British economy grew 0.4 percent in the January-March period, as expected in a Reuters poll. Business investment fell by 0.4 percent year-on-year in the first quarter after rising 3.0 percent in the fourth quarter of last year. (Reporting by Jamie McGeever; Editing by Toby Chopra)