UPDATE 1-Sterling unmoved by Brexit delay, attention turns to vote on election

Olga Cotaga


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

* Graphic: Trade-weighted sterling since Brexit vote http://tmsnrt.rs/2hwV9Hv (Recasts, adds new context and new quote)

LONDON, Oct 28 (Reuters) - Sterling was little changed on Monday after the European Union granted Britain a three-month extension to exit the bloc just three days before the original deadline expires as expectations of a delay were already priced in the currency.

European Council President Donald Tusk said that the 27 countries that will remain in the EU after Britain leaves agreed on Monday to accept London's request for a Brexit extension until Jan. 31, 2020.

EU member states will now wait for Britain's reply before launching a "written procedure" whereby governments will have 24 hours to accept or reject the agreement reached by their envoys to Brussels. "This will allow the decision to be formally adopted tomorrow," an EU diplomat said.

Earlier, a source close to French President Emmanuel Macron said the EU was ready to agree to delay Britain's departure from the bloc. Macron last week prevented the EU from reaching a decision on the delay.

Traders' focus now shifts to a parliamentary session due later in the day at which British lawmakers are expected to vote on whether to hold an early general election.

British Prime Minister Boris 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.

Johnson is demanding parliament approve an election on Dec. 12 in return for having more time to approve his deal. But he needs the support of two-thirds of parliament's 650 lawmakers for a new election.

Given that the three-month Brexit extension has not yet been formalised, lawmakers are unlikely to agree for a snap election on Monday, with another vote possibly being held later in the week or next week, said Athanasios Vamvakidis, global head of G10 FX strategy at Bank of America Merrill Lynch.

Commenting on sterling's muted reaction, Vamvakidis 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 flat at $1.2836 and at 86.42 pence against the euro.

The pound could rise "well above" $1.30, and possibly up to $1.35, if the British parliament approves the Brexit divorce deal, said Vamvakidis.

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 the British currency.

(Reporting by Olga Cotaga; editing by Larry King and Giles Elgood)