The pound has risen amid speculation that Prime Minister Theresa May will win the vote of confidence in her leadership on Wednesday evening.
The currency is trading 1.4% higher against the dollar at $1.2660 and 0.9% higher against the euro at €1.1132.
On Tuesday the pound hit 20-month lows against the dollar on reports that sufficient numbers of Conservative MPs were prepared to force a vote.
A majority of Tory MPs have publicly said they will back the PM in the vote
Spreadex financial analyst Connor Campbell said investors were banking on Mrs May “surviving this latest challenge to her leadership, with the prime minister expected to end the day still in power”.
British Pound against US Dollar
“And even if the vote is an unwelcome distraction from the real issues at hand, a May triumph would in theory reduce the chances of a ‘no-deal’ Brexit,” he added.
The challenge to Mrs May has been brought by Conservative MPs who say Mrs May’s deal with the EU has watered down the Brexit voters were promised in the 2016 referendum.
Her decision to cancel Tuesday’s Parliamentary vote on the deal prompted them to back a confidence vote.
There needed to be 48 MPs calling for her to go, out of 315 Conservative MPs, to trigger a confidence vote and this threshold was reached on Tuesday.
British Pound against euro
Mrs May had meetings with European leaders on Tuesday, seeking support for changes to her Brexit deal in a last-ditch bid to save it.
The European Union has ruled out renegotiating the divorce treaty.
Parliament is set to vote on a deal before 21 January.