Sterling rallied today as Prime Minister Theresa May vowed to fight a leadership challenge and warned rebels within her party that they risked delaying or even stopping Britain's departure from the European Union.
The pound had tanked to 20-month lows after May aborted a planned parliamentary vote on her blueprint on Monday and then lawmakers in her Conservative party gathered enough support to trigger a no-confidence vote in her leadership.
But it stabilised in European trading as some investors bet that May would win this evening's vote and in the process isolate opponents in her party who seek a total break from the EU.
With less than four months until Britain is due to exit the EU on March 29, May warned eurosceptic hardliners that if they toppled her, the departure from the EU would have to be delayed and perhaps even imperilled.
The pound rose as much as 1.26% to $1.265 from below $1.25 earlier in the session.
Against the euro, sterling rose 0.8% to a session high of 89.9 pence but was still near its weakest in three and a half months.
The British currency spiked briefly after German Chancellor Angela Merkel said she had used this week's discussion with May to work on an orderly process for Britain's departure from the EU.
Analysts at Nomura said they expected May to survive the vote because it had taken a long time for opponents to get the 48 letters needed to trigger a ballot, and because many lawmakers had a lot to lose in a change of leadership.
Other analysts were far less confident about May's chances, with those at MUFG saying there was "a high probability" she would be defeated.
Traders warned of more volatility for sterling regardless of the outcome - if May wins only narrowly, her position will remain vulnerable.
Investors have been reluctant to bet on directional moves in the pound as they struggle to see through political instability, preferring instead to bet on rising volatility.
Price swings in the pound have exceeded some high-stakes emerging markets this year.
Should the government be led by a so-called hard Brexiteer opposed to May's withdrawal deal, or if parliament voted for a disorderly Brexit scenario, the pound could lose 5% as the focus turned to "potential capital flight" from Britain, one strategist at JP Morgan said.
May will seek a parliamentary mandate for her deal, probably before January 21.
She is meeting with EU leaders this week to try and get her Brexit withdrawal agreement with Brussels tweaked to convince sceptical colleagues.
Opposition parties and many within her party are angry that the deal, in their view, would leave Britain worse off overall.
A range of Brexit outcomes remain possible, from a second referendum with the British public to a no-deal Brexit to a delayed Brexit.
