The pound is volatile ahead of Tuesday evening’s Commons vote on the prime minister’s Brexit deal.
Earlier it sank after the government’s senior law officer said the legal risk of the UK being tied to EU rules after Brexit “remains unchanged”.
Currency traders fear the attorney general’s advice means Theresa May’s revised Brexit deal is less likely to be accepted by pro-Brexit MPs.
However, the pound has since recovered most of its lost ground.
According to attorney general Geoffrey Cox, the UK may not be able to leave the Irish backstop without the EU’s agreement.
The pound fell from €1.17 to €1.15 against the euro following his words on Tuesday morning. Sterling also fell two cents against the dollar from $1.32 to $1.30.
Mr Cox’s advice is likely to weigh heavily on MPs when parliament votes on the new version of the deal later on Tuesday.
Currency; Pound vs dollar
Simon Derrick, managing director of BNY Mellon, said the fall in sterling reflected increased uncertainty over the Brexit process.
“The market believes it increases the likelihood of a ‘no’ vote tonight,” he said.
“It complicates the issue, it leaves us with the possibility still of a no-deal Brexit, and uncertainty over politics more generally. It muddies the water.”
Mr Derrick said if the prime minister’s deal was defeated by only a narrow margin “that might encourage optimism” that a tweaked deal could be agreed before the end of the month.
However, a substantial defeat for the prime minister was likely to push sterling lower, he said.
“When the deal was originally defeated in January, sterling traded down at $1.26 . You could see it move lower again,” said Mr Derrick.
Earlier on Tuesday the pound had been trading higher after Theresa May said she had achieved “legally binding” changes to her Brexit deal during talks in Brussels.
Mrs May said they could be used to start a “formal dispute” against the EU if it tried to keep the UK tied into the backstop – the safety net designed to maintain an open border on the island of Ireland – indefinitely.
The backstop has been criticised by some who believe it will keep the UK tied to the EU indefinitely, but the bloc has said “if used [it] will apply temporarily”.