* Brexit deal agreement initially boosts pound
* Deal still needs parliamentary approval, doubts linger
* Domestic stocks come off highs, UK yields fall
(Updates with new headline, no change to text)
By Olga Cotaga and Thyagaraju Adinarayan
LONDON, Oct 17 (Reuters) - A surge in sterling and the rally
in Britain's domestically exposed stocks fizzled on Thursday as
investors braced for a showdown in the UK parliament over the
new Brexit deal agreed between Brussels and London.
Both sides had found a "legally operative solution" to avoid
a hard border in Ireland - a key sticking point, EU chief
negotiator Michel Barnier told reporters.
That sent the pound up as much as 1.1% to a five-month high
and within a whisker of $1.30, while UK stocks that make most of
their money at home surged.
But the gains were temporary as the Northern Irish
Democratic Unionist Party (DUP), which has a deal to support
British Prime Minister Boris Johnson in parliament, said it
would vote against the accord at an extraordinary session on
Saturday. That revived fears that Johnson will suffer the same fate as
his predecessor: a failure to get British lawmakers to support
the plan for the departure, plunging the country into another
round of uncertainty.
"The question now is if the UK parliament will approve the
deal or not," said Athanasios Vamvakidis, global head of G10
forex strategy at BAML. Nonetheless, "in the scenario if the
parliament doesn't approve the deal, still having a deal is a
good thing", he said.
Therefore, now "the risk of a no-deal Brexit is very small".
In an extraordinary Saturday sitting, the first since 1982,
parliament will vote on approving British Prime Minister Boris
Johnson's deal. Britain is due to leave the EU on Oct. 31.
But Johnson, whose Conservatives have no majority in the
650-seat House of Commons, will face a deeply divided parliament
where his opponents are trying to force both a delay to Brexit
and another referendum. "Amid the optimism ... as things stand, parliamentary
ratification is far from certain," Dean Turner, an economist at
UBS, said.
The pound was up 0.2%% at $1.2853 by 1520 GMT GBP=D3 - far
below the five-month high og $1.2988 it touched earlier in the
day.
STOCKS AND RATE CUTS
Sterling has been on a rollercoaster ride, and is up 7%
since early September when it hit the lowest since October 2016
at $1.19.
Volatility expectations for sterling over the next week have
jumped to their highest since the 2016 Brexit referendum.
Against the euro, sterling rose 0.2%% to 86.52 pence, having
earlier reached 85.77 pence EURGBP=D3 .
The UK's FTSE mid-cap stocks index .FTMC was well off its
day's high and was last trading up 0.3%. The blue-chip
exporter-heavy FTSE 100 .FTSE index rose 0.5% on sterling's
reversal.
British government bond yields initially surged, with
10-year yields hitting 0.79%, their highest since July
GB10YT=RR , before falling slightly on the day to 0.69%.
The agreement on a deal, while still to face a parliamentary
test, has triggered a rethink on the outlook for UK stocks.
JPMorgan's basket of London-listed companies .JPDEUKDM
that make their cash at home has enjoyed a meteoric rally in the
past week.
In this period it has vastly outperformed the FTSE 100 and
FTSE 250 .FTMC . The benchmark is considered a barometer of
Brexit worries.
Optimism that a Brexit deal would be finalised saw money
markets reduce expectations of rate cuts from the Bank of
England. They now see a 60% chance of a quarter point cut next
December versus 76% on Tuesday and 90% last week BOEWATCH .
Euro zone money markets too priced out chances of a year-end
rate cut ECBWATCH
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Sterling rallies, gilt yields rise https://tmsnrt.rs/2IZUSJs
UK Plc's domestic vs exporter stocks https://tmsnrt.rs/2VYOS9r
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(Writing by Tommy Wilkes
Additional reporting by Saikat Chatterjee, Josephine Mason,
Joice Alves and Yoruk Bahceli; Editing by Sujata Rao and Alison
Williams)