* Graphic: World FX rates in 2019
* Graphic: Trade-weighted sterling since Brexit vote (Recasts, adds latest prices)By Sujata RaoLONDON, Sept 17 (Reuters) - Sterling headed towards six-weekhighs against the dollar on Tuesday as investors continued tocut their short positions, even as Prime Minister Boris Johnsonstuck to his pledge to take Britain out of the European Union byOct. 31.Analysts said investors were continuing to reverse theirbets against the currency as they worried about being caught onthe wrong side should the pound further extend a rally itstarted last week."This does come down to positioning," said Jane Foley, ananalyst at Rabobank. She said that if after the short positionswere covered and there was no more good news on Brexit, sterlinglooked "vulnerable".A broader weaker dollar also helped the pound move higher onTuesday.
Johnson is required by a law passed this month to ask the EUfor a three-month delay to Brexit if a deal is not approved byOct. 19, but British media reported that his team are looking atways to circumvent it. Johnson said on Monday Brexit wouldhappen on Oct. 31, with or without a deal.Britain's top court has started to hear the government'sargument that Johnson's decision to suspend parliament untilshortly before the Brexit date was not illegal as Scottishjudges concluded last week. His opponents say the suspension was aimed at impedingparliament from preventing a no-deal Brexit, an accusationJohnson denies.
"The decisive question for the pound exchange rates remainswhether or not a no-deal Brexit at the end of October is defacto off the agenda," Commerzbank analysts told clients, addingthat the latest developments showed sterling's recent rally wasnot justified.
BREXIT STANCEThe currency has firmed more than 3% in the past month, itsgains accelerating after parliament passed the law ruling outno-deal Brexit. It jumped 1.3% last Friday, grasping at aheadline -- later denied -- that Johnson's Northern Irelandallies may soften their Brexit stance.The pound was last up 0.4% at $1.2481 after losingground on Monday.
Sterling on Monday touched a six-week high of $1.2515. Thecurrency was buffeted by the volatile dollar, which rose late onMonday as oil prices eased and trade tensions with Japanappeared to cool.
Traders are now preparing for the U.S. Federal Reserve'spolicy meeting this week.
Against the euro, sterling was flat at 88.56 pence havingtouched a three-month high on Monday .With less than seven weeks until the Brexit deadline,Johnson is hoping a Brexit deal can be clinched at an EU summiton Oct. 17-18. He said a Brexit deal was emerging, but the EUsaid he had offered nothing to break the impasse.Commerzbank noted that on options markets, insuring againsta steep pound fall still carries a sizeable premium.That shows "options traders do not exclude a major sterlingbang", they added.Two-month implied sterling volatility, the contractencompassing the Brexit deadline and a possible generalelection, ticked up to a one-week high .
Two-month volatility was over 15 vols in early-Septemberbefore tumbling last week to a 9.3 vols low. It stands nowaround 10.3 vols. Meanwhile, three-month volatility, withmid-December expiry, has risen one vol in the past week asinvestors try to price election risk.
Also, reflecting Brexit jitters, Bank of America MerrillLynch's monthly fund manager survey showed investors increasedtheir underweight on UK equities to 30% in September.<^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^GBP implied volatility 3-month vol on the rise again ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^> (Additional reporting by Saikat Chatterjee,Editing by Catherine Evans and Ed Osmond)
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