By Elizabeth Howcroft
LONDON (Reuters) - The pound held steady on Friday ahead of Saturday's vote on the Brexit deal approved at the European Union summit.
Sterling lost initial gains after British Prime Minister Boris Johnson's new deal was approved by the EU as relief that a no-deal Brexit could be off the table succumbed to doubts as to whether the deal will win parliamentary approval.
"(The pound is) reflecting pessimism over the likelihood of whether the deal will be able to pass through Parliament tomorrow," said Lee Hardman, currency analyst at MUFG. "We think it's going to be a close call. We're a little more optimistic.
After gaining as much as 6% against the dollar in the previous six days, the pound moved in a relatively narrow range, holding near five-month highs of $1.2872, a cent down from Thursday's peak of $1.2988 . It was little changed against the euro, at 86.58 pence (EURGBP=D3).
The market is on alert for further swings in the pound, with options linked to volatility expiring within the next week more than doubling in price since Oct. 11 .
Implied overnight volatility on sterling rose to more than 18%, a new seven-month high .
Investors and analysts polled by Reuters this week predict that the pound will rally nearly 4% - to nearly $1.34 - if the deal is approved by the British parliament.
GRAPHIC: Pound gains against the dollar in week leading up to deal - https://fingfx.thomsonreuters.com/gfx/mkt/12/7584/7515/pound%20gains%20against%20the%20dollar%20in%20week%20leading%20up%20to%20deal.png
A CLOSE CALL
Members of parliament will vote on the deal in the first Saturday session since 1982 ahead of Britain's scheduled departure date from the EU of Oct. 31.
Johnson must win 318 votes in the 650-seat parliament to get the deal approved.
The Democratic Unionist Party, the Northern Irish party which props up Johnson's government, said it will not vote for the deal.
Britain's three main opposition parties have also said they will not support the deal.
"If it's rejected you might get a knee-jerk pound selloff, but we don't think the downside risks are that great. We think there'd be an extension and an election. We don't see no-deal risks coming back to the market," MUFG's Hardman said.
French President Emmanuel Macron said that he was opposed to granting an extension if the British parliament rejects the deal.
The yields on ten-year government gilts rose throughout the week, to as much as 0.793 on Thursday - the day the deal was announced - and traded at around 0.717 on Friday, a 17% gain since Monday.