Sterling hits 21-month high on bets Britain can avoid no-deal Brexit

(Adds quote, detail, updates prices)

By Tom Finn

LONDON, Feb 26 (Reuters) - Britain's pound vaulted to a21-month high against the euro on Tuesday after Prime MinisterTheresa May offered lawmakers the chance to vote on delayingBrexit.

By opening up the possibility of avoiding a chaotic no-dealdeparture from the EU - the worst-case scenario for sterling -May's proposal sent the currency surging.

It jumped 1.4 percent against the dollar to a five-monthhigh of $1.3284 and was headed for its biggest daily gain versusthe euro in nearly two years.

Speaking to parliament, May told lawmakers they could voteon March 14 on a motion requesting a "short, limited extension"to the scheduled March 29 departure date if, on March 12, theyrejected the Brexit deal she reached with Brussels.

"For markets, the risk of a no-deal Brexit was already slim;now it's almost vanished," said Lee Hardman, a currency analystat MUFG.

"There may be further gains for the pound because thisincreases the likelihood of May's Brexit deal being accepted bypro-Brexit politicians who want to avoid delaying the process."

May's proposal appeared to take the sting out of votes inparliament on Wednesday on the Brexit process and that alsohelped the pound, analysts said.

Deutsche Bank said it now saw a 10 percent chance of ano-deal happening versus its previous estimate of 15 percent.

Investors are focused on whether May can secure anyconcessions from Brussels in the next two weeks and if lawmakerswho oppose May's deal start to signal a willingness to back it.

May's offer comes after opposition leader Jeremy Corbyn saidon Monday his Labour Party would back a second Brexitreferendum.

Some analysts cautioned that the path through Brexit remainscomplicated and fraught.

"An extension of the Article 50 (departure) deadline couldstill result in a no-deal outcome," said Sarah Hewin, chiefEurope economist at Standard Chartered.

Others say a short delay on Brexit negotiations is alreadypriced in to the pound and a sustained moved higher in thecurrency is unlikely.

"We've had a tick-up in the pound but the market hasfront-run these developments before, only to be disappointed,"said Kallum Pickering, UK economist at Berenberg.

The optimism in spot markets has yet to ripple over toderivatives, with one-month implied volatility gauges on thepound, a market indicator for future expected swings, edginglower but within striking distance of a six-week high.

One-week implied volatility remains elevated due to theuncertainty over the Brexit amendment votes on Wednesday GBP1WO= .

Risk reversals painted a slightly bullish picture withone-month gauges creeping higher in overnight trading.

A large buildup of options between $1.34 and $1.35 indicatethat investors reckon the rally could go a bit higher but maynot last beyond those levels

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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