Although the pound had sunk by more than 1 percent against the dollar earlier in the day on Tuesday, it rallied after the parliamentary vote as May's heavy defeat was seen forcing Britain to pursue different options.
"One thing seems clear - this deal they voted on is now dead, I doubt they can make a few tweaks and salvage it," said Richard Falkenhall, a senior FX strategist at SEB.
"You have to look at alternatives to them: there is no support in parliament for a no-deal Brexit so you end with a softer Brexit, or maybe even a second referendum," he said.
Adam Cole, chief currency strategist at RBC, added that if the opposition Labour party lost the confidence vote as expected, it could switch its focus to a second referendum, again increasing the possibility.
As a consequence, the single currency fell as much as 0.3 percent against the pound in early trade, hitting a seven-week low of 88.44 pence, and was trading at around 88.57 pence by 1200 GMT, down 0.20 percent on the day.
The euro also dropped 0.3 percent against the dollar to its lowest since Jan. 4 at $1.1378, compressed by worries over the euro zone's economic outlook.
Earlier this week, data showed Germany barely escaped a recession in the second half of 2018 and European Central Bank chief Mario Draghi warned on Tuesday the euro zone economy was weaker than expected.
On Brexit, a high degree of uncertainty has to be factored into market projections, others warned.
"Everything remains possible: new elections, an extension of the deadline for Article 50, or even a second referendum," said Stefan Kreuzkamp, chief investment officer at DWS.
"Like many of our peers, we continue to hope for an orderly exit of the United Kingdom from the EU. But the path to get there remains unclear, and in any case cobbled with plenty of hurdles."
The dollar eased 0.1 percent to 108.80 yen after advancing 0.5 percent against its Japanese peer overnight, amid a further ebb in risk aversion with U.S. stocks posting strong gains.
The Swiss franc, which tends to gain in times of political tensions and market turmoil along with the yen, was a touch weaker at 0.99 franc per dollar.
The dollar index against a basket of six major currencies was marginally higher at 96.146 edging towards an 11-day high of 96.261 hit the day before.
The Turkish Lira, meanwhile, strengthened nearly 1 percent to 5.45 liras per dollar after the country's central bank left rates unchanged but said it would tighten monetary policy further if needed. (Reporting by Abhinav Ramnarayan Editing by Peter Graff and Jon Boyle)