Sterling rallied and investors reined in their bets on a big Bank of England interest rate hike in November as UK Prime Minister Liz Truss announced her resignation just six weeks after she was appointed.
Truss' economic programme had sent shockwaves through the markets and divided her Conservative Party, contributing to a sharp sell off in UK assets.
Pressure on the prime minister had been mounting in recent days and a leadership election will be completed within the next week.
The pound, which had rallied ahead of Thursday's news, was last up 0.74% at $1.13060. I t edged 0.17% higher against the euro to around 86.970 pence, moving off a one-week low touched earlier.
"Initially, this is likely to take an uncertainty premium out of the market but it depends who takes over. You need a steady hand at the top," said Viraj Patel, global macro strategist at Vanda Research.
British government bond yields were broadly lower as their prices rose, while shares in London rallied briefly before falling by around 0.2%.
A leadership election will be completed within the next week.
"The short timescales of the leadership contests are designed to minimise impact for the pound, but you would not want to be long (sterling) until we know who takes over," said Kenneth Broux, currency strategist at Societe Generale.
Truss' resignation came a day after a second top minister quit and rowing and jostling broke out among her lawmakers in parliament.
After only six weeks in the role, Truss's premiership has seen a bond market rout and a U-turn on almost all of her fiscal policy programme.
Yesterday saw her lose her interior minister, less than a week after she fired her finance minister.
"Whoever comes in will probably be seen as a more credible prime minister than Liz Truss - on the margins, markets would probably like to see someone like Rishi Sunak," said MUFG currency analyst Lee Hardman.
Analysts said a dialling back of aggressive rate hike bets following comments from the Bank of England's Ben Broadbent had weighed on sterling earlier in the session.
Broadbent said the Bank of England is poised to respond to changes in Britain's tax and spending policies but it remains to be seen if interest rates go up as much as investors have been expecting.
Investors reined in further their bets of a full percentage-point interest rate increase by the Bank of England next month following the comments.
"Broadbent noted that the policy rate may not need to go up as much as markets are pricing and short-term gilt yields and sterling both declined," said Colin Asher, senior economist at Mizuho Bank.
The Bank of England is tasked with bringing down soaring inflation, with data yesterday showing food prices pushed British inflation into double digits last month.
Rating agencies S&P and Moody's review UK sovereign ratings tomorrow, another potential headwind for British markets.