Watford chief executive Scott Duxbury has hailed Javi Gracia as a "fantastic" success since returning to Vicarage Road as head coach.
The Spaniard, previously in charge from January 2018 to September 2019, was reappointed in October when Paulo Pezzolano was sacked.
The Hornets have won seven of their 15 games since then, including the past three, and are sixth in the Championship table before Thursday's home game against Birmingham City.
"Javi has been fantastic since he returned," Duxbury told the club website.
"We knew from his first spell at the club that he just gets what Watford is all about; he understands the culture, the people, and recognises what it means to the fans.