December 18, 2018 / 3:47 PM / 5 months ago

Sterling extends rebound on hopes PM May can avoid no-deal Brexit

* Graphic: World FX rates in 2018 tmsnrt.rs/2egbfVh

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

LONDON, Dec 18 (Reuters) - The British pound rose further away from 20-month lows on Tuesday, helped by a weaker dollar and hopes Prime Minister Theresa May can avoid a no-deal Brexit.

May will seek parliamentary approval for her much-criticised Brexit deal in mid-January but faces an uphill battle in convincing lawmakers to back her - she postponed a previous planned vote after allies warned she would lose badly.

The prime minister pledged on Monday to get assurances from the European Union before mid-January to try and break a deadlock over Britain’s fraught efforts to quit the bloc.

Analysts at Japanese bank MUFG noted that reports stating the EU will not seek a “managed no-deal” should prove a positive for May as it supports her warnings to lawmakers to back her or face economic chaos if Britain crashes out of the bloc in March.

“This should prove somewhat positive for PM May’s position as it serves to worsen the spectre of a bad No Deal scenario, which makes her plan look relatively more attractive,” they wrote in a note to clients.

Most currency analysts think sterling will fall further if May loses that vote, given less than three months would remain until Britain is scheduled to exit the European Union.

The British government on Tuesday stepped up its plans for a no-deal Brexit, underlining the growing risk deadlock over a deal ends in a disorderly divorce between the United Kingdom and its largest trading partner.

At the same time, there are growing hopes of a second referendum or even a delay to Brexit should May’s deal prove an impossible sell to parliament.

The pound rose to as high as $1.2706, its strongest since Dec. 10, before settling around $1.2660 in London trading. The pound hit 20-month lows of $1.2477 last week but has been supported since May survived an attempt by colleagues to oust her from her job.

Underlining that much of Tuesday’s move was because of dollar weakness ahead of a U.S. central bank meeting, sterling gained just 0.1 percent versus the euro to 89.63 pence . The pound has remained in a tight range against the euro, despite severe price swings, as traders await more clarity on where Britain and the EU will stand after March.

Traders are reluctant to bid up the pound too much given the threat of a no-deal Brexit, which most economists agree would severely damage Britain’s international competitiveness.

“In the event of a no-deal Brexit, sterling would likely experience a brutal sell-off, with the pound potentially losing more than 10 percent of its value,” said Michael Brown, an analyst at FX payments provider Caxton.

The leader of Britain’s opposition Labour Party has sought to pile the pressure on May by lodging a motion of no confidence. But the vote is non-binding. (Reporting by Tommy Wilkes; Editing by Andrew Cawthorne)

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