Sterling jumped on Tuesday after the European Court of Justice's advocate general said Britain has the right to unilaterally withdraw its notice that it is leaving the European Union.
The advocate general's advice is non-binding but the prospect of a route out of the Brexit process cheered the market, even as Prime Minister Theresa May pressed ahead with plans for a parliamentary debate on her proposed divorce deal with the EU.
"The parliamentary debate should reiterate the divisions between and within the political parties, pointing to a low likelihood of the Brexit deal being voted through in Parliament next week," said Petr Krpata, a currency strategist at ING.
He said sterling would remain under pressure with the currency converging on 90 pence against the euro.
The comments raised expectations the Labour party could back putting Brexit to a second vote though it is unclear what impact the prospect of a second referendum would have on sterling.
"We doubt this option will impact the pound. A lot of dire developments would probably have to take place first before a second referendum happens," said analysts at MUFG.
Recent positioning data suggests hedge funds have started to unwind large short positions on sterling as hopes grow that Britain may manage to negotiate an orderly Brexit.
"The outcome being priced into GBP right now is the idea of a successful second vote in parliament on the negotiated deal and an orderly exit on March 29," said Simon Derrick, chief currency strategist at BNY Mellon.
(With inputs from agencies.)