Sterling jumped this morning after the dramatic late-night resignation of Cabinet minister David Davis, with traders marking up the chances of Prime Minister Theresa May pushing through a softer Brexit.
Davis, who served for just short of two years as secretary of state for exiting the EU, handed in his resignation following a Cabinet "away day" at Chequers in which May pushed through a negotiating position which envisages a closer relationship between the UK and the EU than many in the Conservative party desire.
Traders were torn between uncertainty over the fate of the government and the possibility of a softer Brexit following the departure of Davis alongside fellow Brexit minister Steve Baker. Davis was replaced by former housing minister Dominic Raab.
Sterling retreated overnight, hitting lows of $1.3284 in early morning trading before rising by as much as 0.5 per cent to hit three-week highs of $1.3363.
The Chequers deal outlines a Brexit negotiating position in which the UK remains part of a customs union for goods, but outside of the EU's regulatory structures for services.
May gained the assent of her Cabinet, aside from Davis's resignation, meaning she may eventually be strengthened if she can survive the near-term turbulence, according to Bart Hordijk, market analyst at Monex Europe.
"Theresa May might be playing a bit of a gamble here, but doing nothing would make her a sitting duck, vulnerable to attack as the March 2019 Brexit deadline draws ever closer," he said. "By taking a more explicit direction she avoids this fate, which is possibly the best bet she has at the moment."
Some Brexit-backing MPs on the right of the Conservative party have threatened to back a leadership challenge against May, but some of the key players have said they will hold back until the government publishes an extensive white paper on Thursday.
Meanwhile, David Davis today told the BBC that he has no intention of running against the Prime Minister.