UPDATE 2-Sterling hits 12-day high vs euro, rebound still shaky

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

* Graphic: sterling year-to-date http://tmsnrt.rs/2egbfVh (Recasts, updates prices, adds more market comment)

By Jemima Kelly and Patrick Graham

LONDON, Oct 19 (Reuters) - Sterling touched its highest in almost two weeks against the euro on Wednesday, holding onto its biggest one-day gain in months and riding out another round of headlines around Brexit negotiations and the government's attitude to the central bank.

Economic data has played second fiddle to politics this week and there was no reaction to data that showed UK job creation slowed -- but did not collapse -- after June's vote for Britain to leave the European Union.

The pound was buffeted in morning trade by headlines confirming that Germany would not engage in talks before Britain gives formal notification of its intention to leave the bloc early next year.

Sterling also briefly gained some ground as finance minister Phillip Hammond spoke in parliament and dealers said it had been helped by a broad dip in implied volatility -- a measure of the scale of expected moves in the months ahead -- across the G10 group of developed market currencies.

"A sell off across G10 vol today generally has been supportive of spot. Vols have come off across the whole complex. That has provided some support for sterling," said Sam Lynton-Brown, a strategist with BNP Paribas in London.

"It is still very difficult to time the reversal of the downtrend (for the pound), but we do think it makes sense to position for a stronger pound from here in the medium term."

BNP is among a group of banks trying to turn more positive on sterling's prospects after a series of falls which have knocked almost a fifth off its value since the June 23 vote.

Having plunged to a record low last week on worries Britain was heading for a "hard Brexit," prioritizing tighter controls on immigration over access to the single market, the Bank of England's trade-weighted sterling index jumped 1.4 percent on Tuesday. It was flat on the day at 74.5 at the bank's 4 p.m. print on Wednesday.

Lawyer James Eadie, who is representing the government in a High Court challenge over who has the right to trigger the divorce process between Britain and the EU, said on Tuesday that parliament -- not just the ruling Conservative government -- would "very likely" have to ratify any Brexit agreement.

"That helped to improve sentiment towards the pound so we had a modest relief rally yesterday," said Bank of Tokyo-Mitsubishi UFJ currency economist Lee Hardman.

"But for that upward momentum to be sustained and for us to see a larger rebound, we'd need to see the courts rule that parliamentary approval is required for triggering Article 50 -- in our view that's more important and the market would be more sensitive to that development."

After gaining as much as 0.3 percent during the day against the dollar, sterling was steady at $1.2295. It gained 0.1 percent to 89.20 pence per euro.

"Expectations for further falls ... are still strong, and the recent rebound is likely being seen by investors as an opportunity to reload selling positions," said FXTM analyst Jameel Ahmad.

London's High Court said it would rule "as quickly as possible" on whether parliament in its entirety must trigger Article 50, which starts formal divorce proceedings.

Whichever side loses will almost certainly appeal to the Supreme Court, which will not give a verdict until December. (Additional reporting by David Milliken; Editing by Catherine Evans)

Continue Reading