Wires

UPDATE 1-Sterling edges higher after lawmakers reject early election bid

Olga Cotaga

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

* Graphic: Trade-weighted sterling since Brexit vote http://tmsnrt.rs/2hwV9Hv (Adds election vote, updates prices)

LONDON, Oct 28 (Reuters) - Sterling edged slightly higher against a struggling dollar on Monday after British lawmakers rejected Prime Minister Boris Johnson's bid to end the political paralysis around Brexit with a Dec. 12 election.

Johnson failed to gain the majority backing in parliament he required for an election, the third time he has failed to do so. The vote took place after the European Union agreed to a three-month flexible Brexit delay.

"The market reaction is fairly muted as the extension was widely expected," said Marija Veitmane, a senior strategist for multi-asset class research at State Street Global Markets, adding that the path to Brexit resolution remains fraught with political challenges.

Johnson, who pledged to deliver Brexit on Oct. 31 "do or die", was forced to request a delay after parliament rejected the sequencing of ratification of his exit agreement.

Commenting on sterling's muted reaction, Athanasios Vamvakidis, global head of G10 FX strategy at Bank of America Merrill Lynch, said: "The risk for a no-deal Brexit has been reduced substantially, but the market has not yet priced in a deal scenario."

The pound was trading a touch higher at $1.2866 and at 86.28 pence against the euro.

The derivatives market was also quiet, with three-month sterling implied volatility gauges falling slightly.

With the EU agreeing to a third Brexit extension, "one element of certainty is coming back and should support sterling", said Neil Jones, head of European hedge-fund sales at Mizuho, adding that he is suggesting to clients that the pound will trade higher.

"For me, the potential certainty ahead is a lot higher than what the market is factoring in," Jones said.

Leveraged funds that bet on the direction of sterling reduced their short positions on the pound in the week to Oct. 22 to $4.16 billion, a four-month low, according to CFTC data on Refinitiv.

Still, those levels showed that market participants remained overall negative on sterling compared with April 2018, when speculators were broadly long on the British currency.

(Additional reporting by Karen Brettell in New York Editing by Angus MacSwan)