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Sterling steady in calm before the storm; Brexit talks in focus

* Graphic: World FX rates in 2020 tmsnrt.rs/2egbfVh

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

LONDON, Sept 10 (Reuters) - The British pound calmed down on Thursday after whipsawing the day before as investors tried to understand whether a British bill to overwrite the Brexit divorce deal will cause the European Union to leave the negotiating table.

Sterling may be poised for more volatility as Britain and the EU will hold emergency talks on Thursday. After Britain explicitly stated that it would act outside international law by breaching the divorce treaty, EU negotiators are trying to gauge how to deal with London.

The bloc could take legal action under the treaty with Britain if emergency talks on Thursday do not reassure Brussels sufficiently that a proposed new British law will not break previously agreed commitments.

On top of that, U.S. House of Representatives Speaker Nancy Pelosi said on Wednesday any potential U.S.-UK trade deal would not pass the U.S. Congress if Britain undermines the Good Friday Agreement as it exits the EU.

The Good Friday Agreement - which ended a political conflict in Northern Ireland - lies at the heart of the Brexit Withrawal Agreement, which if undercut, would spark tensions at the Irish border.

This comes in a blow to Britain who hopes to forge trade deals with the U.S. and China after its official departure from the bloc. Signing agreements with other countries on its own served as one of the main reasons why Britain said it wanted to get out of the EU in the first place.

Overnight sterling implied volatility rose to 13% , its highest since March 26, when markets were in turmoil because of the coronavirus pandemic. Higher implied vols suggests traders are adding options contracts to protect against unexpected moves in the currency.

The pound was last flat at $1.2999, having fallen on Wednesday to a six-week low of $1.2885. Versus the broadly stronger euro, sterling fell 0.1% at 90.89 pence.

“Despite the recent sterling fall and given the prior market complacency, we estimate that only a limited degree of risk premium is priced into the currency, allowing for further sterling downside,” said ING analysts in a note to clients.

ING forecasts that euro/sterling will break the multi-month high of 91.76 pence in coming days, it said.

Reporting by Olga Cotaga; Editing by Angus MacSwan

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