* Graphic: World FX rates in 2019 tmsnrt.rs/2egbfVh
* Graphic: Trade-weighted sterling since Brexit vote tmsnrt.rs/2hwV9Hv (Recasts, adds new quote, background info and updates prices)
By Olga Cotaga
LONDON, Jan 7 (Reuters) - Sterling fell on Tuesday as the dollar rose, with investors watching British lawmakers’ return to parliament after the Christmas recess in preparation to vote on Prime Minister Boris Johnson’s European Union (EU) withdrawal deal.
Earlier in the day, the pound rose to a five-day high of above $1.32, but as American traders returned to their desks, it fell to nearly $1.31.
The U.S. dollar has recovered some ground amid market relief that the situation in the Middle East has not deteriorated further. Participants were closely watching for signs of Iranian retaliation after Iranian Major-General Qassem Soleimani was killed in a U.S. drone strike on his convoy at Baghdad airport.
Returning to Britain after winning an 80-seat majority in the lower house in last month’s election, Johnson’s Conservative Party looks more than likely to pass the bill, analysts say, paving the way for Britain’s exit from the EU on Jan. 31.
There are three days scheduled for debate before a vote on the bill on Thursday. It will then go to the House of Lords.
The pound was last trading down 0.3% at $1.3129 and flat at 85.02 pence against the euro. It strengthened earlier to as much as $1.3210 and 84.68 pence, its highest since Jan. 2.
Sterling/dollar “will likely follow the market’s tone for the remainder of the week,” said Shaun Osborne, chief FX strategist at Scotiabank.
Expectations that Britain will finally leave the bloc this month has ended uncertainty about its position and lifted sterling, but the currency is likely to come under pressure again when negotiations about Britain’s EU trade deal begin.
Implied volatility gauges showed no sign of investors fleeing to protect their portfolios ahead of Brexit.
Britain’s emergency preparations for a no-deal Brexit have been halted “with immediate effect”, Sky News reported, citing a letter by a senior official at the Department for Exiting the EU.
Neil Mellor, senior forex strategist at BNY Mellon, sees further hurdles in store for the British currency and trade could be volatile.
“There’s going to be a strain on sterling going forward because it’s very clear that the EU doesn’t want to facilitate a competitor,” he said.
For now though, markets are enjoying some sort of Brexit clarity and French President Emmanuel Macron has sounded in the past “accommodating”, so more headlines like this could support sterling, Mellor said.
Investors’ views on the U.S. dollar will also impact the direction of the pound, he added. (Reporting by Olga Cotaga; Editing by Susan Fenton and Andrew Cawthorne)