The pound has slipped back from its highs of earlier on Wednesday even though Prime Minister Theresa May won the vote of confidence in her leadership.
After the result, it dipped to $1.2603, having hit a high of $1.2672 earlier.
Of the the 317 Conservative MPs, 200 backed the prime minister, but 117 voted against her.
XTB Online Trading said the “far from comprehensive victory” had caused “some selling in the markets”.
Chief market analyst David Cheetham said the pound had erased some of its earlier gains and headed back lower.
However, the pound subsequently recovered ground and is still 1.14% up on the day against the dollar at $1.2635 and about 0.7% ahead against the euro at €1.1109.
‘Not absolute disaster’
Currency traders had expected Mrs May to win the confidence vote, and the pound traded ahead for much of Wednesday.
CIBC’s head of foreign exchange strategy, Jeremy Stretch, described the outcome of the confidence vote as “not a great result but not an absolute disaster”.
He said the pound had not got near to $1.27 against the dollar and the “scale of the win has for now limited [the pound’s] impetus”.
The challenge to Mrs May was brought by Conservative MPs who said Mrs May’s deal with the EU had watered down the Brexit that voters were promised in the 2016 referendum.
Her decision to cancel Tuesday’s parliamentary vote on the deal prompted them to back a no confidence vote.
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. She will discuss further changes at an EU summit on Thursday.
The European Union has ruled out renegotiating the divorce agreement.
Parliament is set to vote on a deal before 21 January.
XTB’s Mr Cheetham said: “Given that more than a third of her own party voted against her it seems increasingly implausible that she will get the requisite backing in Parliament to push through her deal.
“The result leaves the overall level of uncertainty at unprecedented heights – something that doesn’t bode well for the pound,” he added.