January 25, 2019 / 8:52 AM / in 6 months

Sterling's rally finds fresh legs on hopes for May's Brexit deal

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

* Graphic: Trade-weighted sterling since Brexit vote tmsnrt.rs/2hwV9Hv

LONDON, Jan 25 (Reuters) - The pound held near an 11-week high on Friday after a newspaper reported the party that props up the minority Conservative government could support Prime Minister Theresa May’s Brexit deal, on certain conditions, in a preliminary vote next week.

The Sun newspaper said Northern Ireland’s Democratic Unionist Party had privately decided to back May’s deal in parliament if it included a clear time limit to the “backstop”, a provision to prevent routine checks on the Irish land border.

The House of Commons will vote next Tuesday on alternative Brexit plans after rejecting the deal May negotiated with the European Union, a development that pushed the bloc to brace for a no-deal Brexit in two months.

The British currency <GBP=D3) scaled a high of $1.3140 for the first time since Nov. 8 in Asian trading before edging back to trade at $1.3088.

The pound has gained more than 2.5 percent this month, making it the best performing G10 currency against the dollar, with most of the gains coming in the last few days on growing hopes Britain will be able to avoid a no-deal Brexit.

Morgan Stanley strategists said in a daily note the pound could rally to as high as $1.45 if May’s deal wins parliamentary approval next week, or to as high as $1.37 if there is an extension in the timeline of Britain’s exit from the EU.

On Jan. 29, parliament will debate May’s proposed next steps and alternative plans lawmakers have put forward. They include delaying Britain’s March 29 exit. For a factbox, see

Implied volatility gauges for the pound extended their downward path, with one-month tenors falling to a two-month low on Thursday at around 9.85 vol, nearly half of levels seen in mid-November.

Against the euro, the pound was broadly flat at 86.61 pence. (Reporting by Saikat Chatterjee; Editing by Kevin Liffey and Mark Potter)

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