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Sterling awaits Brexit deal confirmation, approaches 2-1/2-year high

* Graphic: World FX rates in 2020 tmsnrt.rs/2egbfVh

* Graphic: Trade-weighted sterling since Brexit vote tmsnrt.rs/2hwV9Hv

LONDON, Dec 24 (Reuters) - Sterling extended gains on Thursday and appeared set for another push higher as traders waited confirmation that Britain and the European Union had finally clinched a deal to govern their trading relationship when the Brexit transition ends on Dec. 31.

The currency has strengthened 1.4% versus the dollar since Reuters reported around 1330 GMT on Wednesday, quoting sources, that a Brexit deal appeared imminent.

It is now around $1.3580, up 0.6% on the day and heading towards the 2-1/2 year high of $1.3625 hit last week.

Against the euro, it was up 0.3% by 0830 GMT at 89.9 pence.

There is yet no official confirmation of a deal but sources say a deal is close as British Prime Minister Boris Johnson held a late-night conference call with his senior ministers, and negotiators pored over reams of legal texts.

While the pound and UK stocks have rallied strongly in recent weeks as optimism grew over a last-minute deal, the consensus is most UK assets remain undervalued and will gain further once a deal is confirmed.

FTSE mid-cap stocks, which are more oriented towards the domestic UK economy, rose 0.7% to the highest since February.

“We are overweight UK domestic equities and slightly overweight sterling,” analysts at Candriam told clients.

“UK equities are the ultimate value play. They should fully benefit from a relief if we find a Brexit agreement and from the recovery once we come out of the health crisis.”

The Brexit deal hopes have pushed UK 10-year government borrowing costs more than 10 basis points higher on Wednesday . The market has since stalled as it awaits confirmation of a deal and also given the pressure on the UK economy from Brexit and coronavirus-linked lockdowns. (Reporting by Sujata Rao Editing by Rachel Armstrong)

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