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Sterling hits 10-month high as dollar dips on Fed

* Graphic: sterling and gilt yields http://bit.ly/2dgAXn1

* Graphic: World FX rates in 2017 http://tmsnrt.rs/2egbfVh

* Graphic: Trade-weighted sterling since Brexit vote http://tmsnrt.rs/2hwV9Hv

LONDON, July 27 (Reuters) - Sterling hit a 10-month high against a broadly weaker dollar on Thursday, after the U.S. Federal Reserve left policy unchanged and appeared less confident about inflation picking up, which investors took as a sign rates could be kept low for longer.

The market focused on the central bank's noting that both overall and core inflation had declined, and its removal of the qualifier "recently," which they saw as potentially reflecting concerns that a slowdown in consumer price rises might not be temporary.

With the dollar skidding across the board, the pound took advantage, hitting as high as $1.3157, its highest since mid-September. By 0810 GMT on Thursday it had eased back to $1.3138, up 0.1 percent on the day, but that still left it around 1 percent stronger than before the Fed.

"Coupled with ongoing political woes, even a slightly dovish Feds tilt is currently more than enough for markets to continue capitulating on the dollar and rotating further away from (it)," said ING chief EMEA currency strategist Petr Krpata.

Against the euro, it has been a different story for sterling. As the single currency has rallied both on dollar weakness and expectations that the European Central Bank will tighten monetary policy last year, the pound has fallen to eight-month lows in recent weeks.

It was slightly higher on Thursday but still less than a cent away from that low, at 89.18 pence per euro.

"Last years high at 93 pence remains possible, however a break below 89 pence could well open up a move back to the support at 88.70/80 in the short term," said Michael Hewson, CMC Markets strategist.

Data on Wednesday showed Britain's economy gathered only a little speed in the second quarter after almost stalling at the start of the year, pouring cold water on expectations for UK interest rate hikes in the coming months.

Growth of 0.3 percent on the quarter was up from 0.2 percent in the first three months of the year, in line with forecasts. But that figure is likely to cement expectations that the Bank of England will keep interest rates on hold next week at their record low level, when they also release a quarterly Inflation Report.

Strategists say developments around Brexit will continue to be the main driver for the pound, which has fallen around 13 percent against the dollar since last June's referendum. (Reporting by Jemima Kelly; Editing by Keith Weir)