UPDATE 1-Sterling hovers below $1.30 as crunch Brexit votes loom

Sterling hovered below $1.30 on Tuesday as investors awaited votes in Britain's parliament that will determine whether the country can leave the European Union at the end of October. Prime Minister Boris Johnson faces two crucial Brexit votes in the House of Commons later in the day, with his promise to lead Britain out of the bloc on Oct. 31 hanging in the balance.

Lawmakers will vote at about 1800 GMT on Johnson's so-called Withdrawal Agreement Bill and then on the government's tight timetable for approving the legislation. Defeat in either vote would scupper Johnson's plans to leave the EU on Oct. 31. He would then have to decide whether to abide by a law that demands he accept any Brexit delay offered by the EU, or somehow leave without a divorce deal.

But markets now see the last possibility as unlikely and that has boosted the pound about 6% since Oct. 10, lifting it to 5-1/2-month highs of $1.3012 on Monday. "The downside risks for sterling are rather limited at this point, and a no-deal Brexit seems rather unlikely," said Thu Lan Nguyen, FX strategist at Commerzbank.

"Even if parliament doesn't pass the bill and we get an extension, sterling will stabilize." Sterling traded below Monday's highs and was up 0.1% at $1.2968 shortly before midday in London. Against the euro, it fell 0.1% and was the last trading at 0.85910.

Both the pound and British government bond yields have been lifted by fading expectations of interest rate cuts by the Bank of England. Money markets now see only around a 60% chance of a 25 basis point cut in December 2020. They had been fully pricing a 25 basis point cut next May as recently as Oct. 10, when Johnson made his Brexit breakthrough during a meeting with the Irish prime minister,

Analysts at MUFG said the Brexit deal would have to pass through parliament without any hitches for sterling to sustain levels above $1.300, cautioning this was not a foregone conclusion. "It is not yet a done deal and may still require another Brexit extension and snap general election to break the deadlock in parliament," they wrote.

Sterling implied volatility - the gauge of expected swings in a currency - has trended lower as the risk of a no-deal Brexit has faded. But overnight implied volatility surged ahead of parliament's votes to over 26%, the highest since mid-2017.

Also Read: BRIEF-Brexit Party Leader Farage Says Only Way To Get Brexit Done Now Is For UK PM Boris Johnson To Back No Deal - Telegraph Op-ed