Deeney's current contract expires at the end of the season and there has been speculation that he could leave Vicarage Road.
But it is understood that Deeney is ready to commit his future to the Hornets by signing a new three-year deal.
The 24-year-old has been in excellent form this season to help Gianfranco Zola's side mount a strong challenge for promotion to the Premier League.
He has attracted interest from a number of clubs and was linked with a move to Aston Villa in January.
But Deeney will be focused on sealing a place in the top two of the Championship for Watford and looks set to stay beyond the end of the season.