* Pound fluctuates in over a cent's range against dollar
* One-month sterling implied volatility spikes
* HSBC sees GBP/USD falling to $1.20
* Nomura pegs "no-deal" Brexit probability at 40%
* ING says sterling could find support at $1.2870 (Updates after EU statement in response to UK draft bill)By Ritvik CarvalhoLONDON, Sept 9 (Reuters) - Sterling hit a six-week low below$1.29 on Wednesday before bouncing back above $1.30 as Britainunveiled draft legislation for post-Brexit life, stoking concernthat trade talks with the European Union could be derailed.The text of the legislation - called the Internal MarketBill - acknowledged "inconsistency" with international law andprompted a rapid rebuke from the EU's chief executive.It also raised the possibility of Britain exiting the EUsingle market in four months with no replacement trade agreementin place, analysts said.Already on the backfoot against the dollar, sterling fell to$1.2885, its lowest level since July 28, after the bill waspublished .That came as EU chief negotiator Michel Barnier arrived inLondon for fresh talks, suggesting to some that Prime MinisterBoris Johnson might be trying to goad the bloc into storming outof negotiations.But after EU sources told Reuters the bloc would not seek asuspension of talks, the pound bounced back above $1.30. By 1520 GMT, the currency was 0.25% higher at $1.3012."It's the comment we had from the EU not seeking to suspendBrexit negotiations over the internal market bill - that's whatis supporting the market," said Sarah Hewin, economist atStandard Chartered."The issue has been: how will the EU respond? It seems likethey regard the bill as tolerable, or that they can work withit," Hewin said. "But it could also mean the EU just wants theUK to explain its actions first before making a decision."Jittery markets also lifted one-month sterling impliedvolatility to the highest in nearly five months at 10.4%, wellabove the 12-month contract as the options curve inverted forthe first time in five months.
That implies traders see greater risks in the near term.
Jane Foley, head of FX strategy at Rabobank, said the broadmove higher in the euro against the dollar too had helped thepound recover against the greenback. Sterling remained down 0.3%at 90.96 pence against the euro. MORE WEAKNESS, VOLATILITY IN STOREBritain and the EU have until next month to agree a freetrade deal. That would ease the worries of companies who feardisruption at the borders and of supply chains.
But Britain is ramping up preparations for a no-deal exit,pushing sterling more than 2% lower against the dollar sinceFriday. HSBC said it saw the pound falling to $1.20."Quite how the UK is going to agree multiple new tradeagreements with partners around the world whilst openly floutinginternational treaties is a question that (sterling) isanswering in resounding fashion in its decline," the bank toldclients.Jordan Rochester, a strategist at Nomura, pegged theprobability of a no-deal Brexit at 40%.He said the bill's "notwithstanding" clause - allowing theUK to unilaterally overwrite parts of the agreement - mightpersuade the markets that no deal was the most likely scenario.Thursday's meeting between Barnier and British negotiatorDavid Frost is the next key signpost for markets, SocieteGenerale strategist Kenneth Broux said.He predicted more pound volatility "as the EU tries tounderstand what the UK is getting at with the Internal MarketBill and whether it brings risk of backsliding on the WithdrawalAgreement."
<^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^Pound volatility curve ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^> (Reporting by Ritvik Carvalho; additional reporting by SaikatChatterjee;
Editing by Emelia Sithole-Matarise, Kevin Liffey and AndrewCawthorne)