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FOREX-Euro drifts ahead of ECB, no-deal nerves knock sterling

* Euro inches down ahead of Thursday’s ECB meeting

* Pound slips as no-deal Brexit talk grows louder

* Graphic: World FX rates in 2020 tmsnrt.rs/2RBWI5E

LONDON, Sept 8 (Reuters) - The euro and dollar kept moves to a minimum on Tuesday ahead of the European Central Bank’s post-summer meeting later in the week, while renewed warnings of a no-deal Brexit skittled sterling again.

The euro bobbed back under $1.18 but the pound sank nearly 1% to $1.3050 and the yuan dipped too after U.S. President Donald Trump warned about “decoupling” the U.S. and Chinese economies.

Britain had gone into Tuesday’s fresh round of Brexit trade talks warning it was ramping up no-deal preparations. A sense of crisis took hold as the Financial Times reported the head of Britain’s legal department had quit over suggestions Boris Johnson wanted to override parts of the existing divorce deal.

“Clearly the headlines about the UK government drawing up some withdrawal agreement overrides is not going to sit well with officials in Brussels if they are true,” said Lombard Odier’s head of FX strategy Vasileios Gkionakis.

“We are still looking for a skinny, skeleton, basic deal whatever you want to call it. But as time draws on, the risk of a no deal Brexit rises.”

Moves among the other major currencies were mostly modest, with the dollar pushing gently higher as risk appetite appeared to falter again in equity markets.

The Australian dollar reversed course to drop to $0.7250 and the New Zealand dollar dipped to $0.6660 following a Sunday statement from the central bank, which again raised the prospect of negative rates.

In emerging markets, Turkey’s lira hit another record low and Russia’s rouble sagged to it lowest since April amid ongoing talk about fresh Western sanctions.

SUGA RUSH

The main focus this week is on the European Central Bank’s policy decision on Thursday.

Most analysts don’t expect a change in the central bank’s policy but are looking to the message on its inflation forecasts and whether it seems concerned by the euro’s strength following its recent rise to $1.20.

Lombard Odier’s Gkionakis said some more verbal intervention from ECB head Christine Lagarde was more likely than action at this point, a view shared by other analysts.

“The ECB could raise more concerns over a further appreciation in the euro and make some downward revisions to its inflation projections,” said Commonwealth Bank of Australia currency analyst Kim Mundy, which would flag easier policy.

Elsewhere, the dollar traded firmly against the Japanese yen amid talk of a snap election - something that Yoshihide Suga, frontrunner to succeed Shinzo Abe in next week’s leadership ballot - signalled in a newspaper interview.

Analysts say many currency market participants no longer consider the leadership race as a catalyst, as the next leader is likely to follow Abe’s policy path.

“Around eight years ago (when Abe took over), the yen was stronger at around 70 per dollar. But with the current dollar/yen level, there’s nothing much the successor can do currency-wise,” said Daisuke Karakama, chief market strategist at Mizuho Bank.

The yen last changed hands at 106.26 per dollar. Traders also sold sterling against the yen. It last traded at a two-week low of 138.52.

Japan’s economy shrank an annualised 28.1% in April-June, worse than the initial estimate of a 27.8% contraction, revised data from the Cabinet Office showed on Tuesday.

Euro zone data also showed its economy shrivelled by slightly less than initially estimated in the second quarter, but the drop was still the sharpest ever as consumer spending caved in due to COVID-19 restrictions.

Additional reporting by Tom Westbrook in Singapore and Eimi Yamamitsu in Tokyo; editing by Emelia Sithole-Matarise

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