UPDATE 1-Sterling steady as traders watch Brexit talks, await Supreme Court ruling

Olga Cotaga


* Graphic: World FX rates in 2019 http://tmsnrt.rs/2egbfVh

* Graphic: Trade-weighted sterling since Brexit vote http://tmsnrt.rs/2hwV9Hv (Updates prices, adds chart, quote and context)

LONDON, Sept 23 (Reuters) - Sterling held steady on Monday as investors looked for signs of progress in Britain's Brexit talks and awaited a Supreme Court ruling on whether Prime Minister Boris Johnson misled Queen Elizabeth over his reasons for suspending parliament this month.

Traders will be looking for any movement in Britain's negotiations on leaving the European Union when Johnson meets European leaders on the sidelines of a United Nations General Assembly in New York.

Expectations for such progress were low, however, and the substantial volume of short positions already built up on sterling may shield the currency from any sharp declines, analysts said.

Johnson is expected to meet European Council President Donald Tusk as well as German and French leaders Angela Merkel and Emmanuel Macron while he is in New York.

"We are skeptical of much in the way of progress being made and on top of that there is also the risk of PM Johnson having to cut his trip short to return to London if the Supreme Court decision goes against the government," said MUFG analysts in a note to clients.

Johnson suspended - or prorogued - the British parliament for five weeks until Oct. 14 in a tactical move seen by critics as an attempt to stop MPs from preventing Britain leaving the bloc on Oct. 31. Scotlands highest court of appeal ruled the suspension unlawful, but Johnson appealed.

The Supreme Court said it will issue its decision at 0930 GMT on Tuesday.

If it rules against the government it would increase political uncertainty in the country and "weigh on sterling a little," said Jeremy Stretch, head of G10 forex strategy at CIBC.

The collapse of British travel firm Thomas Cook could also put some pressure on the pound as it highlighted the weakness of the British retail sector, Stretch said, adding that he sees "a drift lower for cable (pound/dollar) for now."

Sterling/dollar will likely trade around "$1.23 in the short term," Stretch said.

By 1130 GMT, the pound was down 0.2% at $1.2448, having dropped earlier to a six-day low of $1.2420, mostly due to broad-based dollar strength.

The dollar index was up 0.2% at 98.68 after rising earlier to a 1-1/2 week high of 98.832.

Against the euro, the pound was up 0.1% at 88.235 pence .

Hedge funds have trimmed slightly their holdings of short positions on the pound to $6.73 billion in the week to Sept. 17, according to the Commodity Futures Trading Commission, but the amount was still close to the two-year high of $7.81 billion it reached last month.

Last Thursday the pound hit a two-month high after European Commission President Jean-Claude Juncker said a Brexit deal was possible. But on Friday traders' optimism dissipated and sterling pulled back after Irish Foreign Minister Simon Coveney said London and the European Union were not yet close to a Brexit deal.

"In terms of Brexit news, the outlook for sterling is still binary," said Jane Foley, senior currency strategist at Rabobank.

"If optimism is extended, euro/sterling can be expected to push back below the 0.88 level this year. By contrast, if hopes that a deal could still be in place by the end of next month are snuffed out, euro/sterling could be re-setting its sight on the 0.90 level and potentially above," Foley said.

(Reporting by Olga Cotaga; Editing by Hugh Lawson)