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Sterling inches lower on skepticism over Brexit transition deal

* Graphic: World FX rates in 2018 http://tmsnrt.rs/2egbfVh

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

LONDON, March 15 (Reuters) - Sterling hovered below its highest level in nearly two weeks on Thursday, falling slightly against both the dollar and the euro amid some skepticism over the prospect of a smooth transition deal for Britain in Brexit negotiations.

The pound hit its highest level since Feb. 27 this week, helped by an upbeat assessment of Britain's economy by British finance minister Philip Hammond and a broader weakening of the dollar that was spurred by U.S. President Donald Trump's sacking of his Secretary of State Rex Tillerson.

There was no economic data to drive the pound on Thursday, and traders remained focused on a Bank of England policy meeting next week and a European Union leaders summit where Britain has said it will announce a deal on its relations with the bloc immediately after Brexit.

Worries have grown that Britain and EU officials would fall short of securing a transition arrangement at a March 22-23 summit as differences have grown in recent days. Such an outcome could question market expectations of a 25 basis point rate increase by the central bank in May.

"I think sterling markets don't actually think there's going to be much progress in the next couple of weeks. When we look at sterling, it should be trading above $1.40, but there's a bit of a Brexit risk premium pressed in," said Viraj Patel, currency strategist at ING.

"It suggests that the propensity for sterling to rise is higher if we get some good news."

By 0935 GMT the pound was flat at $1.3965.

It was flat at 88.57 pence per euro.

Sterling hit $1.4346 on Jan. 25, its highest level against the U.S. dollar since Britain voted to leave the European Union in June 2016.

Though it has pulled back modestly from those highs, it remains near the top of its trading range of $1.20 to $1.43, buoyed by hopes a Brexit transition deal will be eventually be struck and a generally weaker U.S. currency.

Michael Hewson, chief analyst at CMC Markets, said that if the pound could not push above the $1.40 level, it ran the risk of a move back towards the month's low, of $1.3710. (Reporting by Ritvik Carvalho Editing by Tommy Wilkes and Matthew Mpoke Bigg)