Peñaranda, 21, finally obtained a work permit which means he is now available for immediate selection by 'Hornets' manager Javi Gracia.
The Venezuelan joined Watford in February 2016 from Udinese in Italy, but was unable to make an appearance and, as a result, was sent out on loan back to Udinese, as well as to Granada and Málaga.
Peñaranda has made 13 international appearances for Venezuela and was also a member of the under-20 side who were runners-up in the World Cup in 2017.
Javi Gracia spoke of the player: "I think he is a good player, but he needs to improve his behaviour on the previous seasons when he has been out on loan."