* 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 Ritvik Carvalho
LONDON, Sept 26 (Reuters) - Sterling hit a 10-week high against the euro on Tuesday, as worries over a period of political uncertainty in Germany following elections on Sunday continued to drag the single currency lower.
Fears that German Chancellor Angela Merkel could find it difficult to strike a coalition deal with parties that are radically different from her own have weighed on the euro since the results of Sunday’s election, with the single currency recording its worst day this year against the dollar on Monday.
That weakness was the main reason for sterling’s rise, analysts said. In morning trade in London, the pound strengthened to 87.545 pence per euro, up 0.4 percent on the day. That was its highest level since July 17.
“It is the sentiment after the German elections on Sunday (that is causing this move) ... There’s ... uncertainty whether Merkel can find common ground between the three different parties,” said Nordea currency strategist Niels Christensen.
Investors were also closing out long-euro positions towards the end of the month, Christensen said, which was amplifying the euro’s weakness.
Sterling also climbed 0.1 percent to $1.3475, up from a 10-day low of $1.3432 hit on Monday.
Bets that the Bank of England will raise interest rates in coming months last week pushed the pound to its highest levels since the Brexit vote, with investors trimming their bets against the currency to the lowest in nearly two years.
However, traders said sentiment on the pound had turned somewhat negative after a speech on Friday by British Prime Minister Theresa May that was intended to revive Brexit negotiations. Investors said May had failed to give enough concrete details on Britain’s negotiating position.
“UK PM May’s landmark speech on Brexit negotiations was a step forward and reduces the risk of an early end to the negotiations and ultimately of a cliff-edge departure by the UK in March 2019,” wrote strategists at Credit Agricole.
“That said, the speech lacked the precise negotiating position needed to unblock the talks in the short term, thus discussions about the future relationship are unlikely to start before year-end.”
Negotiations have resumed this week in Brussels, with the European Union’s chief negotiator Michel Barnier saying on Monday that Britain, which has asked for a two-year transition period after it leaves the bloc in 2019, would have to abide by all EU rules during this phase.
Reporting by Ritvik Carvalho and Jemima Kelly; Editing by Kevin Liffey