Pengvellir is a rift valley caused by the pulling apart of the American and European tectonic plates. They pull apart here at the rate of 1 cm per year. It is also where Viking chieftains met and officially formed the nation of Iceland, back in the 900's.
That steam visible in the far distance is from a geothermal plant.
This photo is taken from the same position as the top one, but looking across the valley.