LONDON: Sterling rose on Wednesday as Prime Minister Theresa May vowed to fight a challenge to her leadership and warned rebels within her party that they risked delaying or even stopping Britain's departure from the European Union.
The pound had fallen to 20-month lows overnight after lawmakers in May's Conservative party gathered enough support to trigger a no-confidence vote in her leadership.
But it then stabilised as some investors bet that May would win Wednesday's vote and in the process isolate opponents in her party who seek a total break from the EU.
The ballot, which is to be held between 1800 GMT and 2000 GMT on Wednesday, has further disrupted May's Brexit plans after she delayed a parliamentary vote on her blueprint on Monday.
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.
"Even though there's tremendous uncertainty and we've reached a low in Britain's institutional crisis, we're a touch positive on the pound," said Giuseppe Sersale, fund manager at Anthilia Capital in Milan.
"We don't expect anyone will want to take responsibility for a hard Brexit and we think the worst case scenario can be avoided," he added.
The pound rose as much as half a percent to $1.2551 from below $1.25 earlier in the session. It stood at $1.2523 by 1030 GMT. Against the euro, sterling rose 0.3 percent to a session high of 90.255 pence.
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" that 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.
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 percent as the focus turned to "potential capital flight" from Britain, said John Normand, head of cross asset fundamental strategy at JP Morgan, while adding that this was not his base case.
May will also seek a parliamentary mandate for her deal, probably before Jan. 21. She is meeting with EU leaders this week to try and get her Brexit withdrawal agreement tweaked to convince sceptical colleagues.
The prime minister had been expected to lose Tuesday's cancelled vote on her agreement with Brussels badly, with opposition parties and many within her party 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.
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