Sterling surged Wednesday as British Prime Minister Theresa May repelled a leadership challenge and quieted a destructive mutiny within the U.K.'s Conservative Party. Conservative lawmakers voted to back May in a widely followed secret ballot, though the outlook for Britain's exit from the European Union remains clouded. Against the 200 lawmakers backing May, 117 voted that they had no confidence in her leadership. The currency jumped into the vote then pared some gains after the actual result. Sterling last traded up 0.9 percent.

Downside risks

On Tuesday morning, the prime minister confirmed the government would delay a critical Brexit vote in parliament, which had been scheduled to take place later that day. Despite saying there was broad support for her proposed Brexit deal, May said defeat was all but certain amid concerns about the issue of the Northern Irish backstop.

Prime Minister Theresa May makes a statement in Downing Street after it was announced that she will face a vote of no confidence, to take place tonight, on December 12, 2018 in London, England. Leon Neal | Getty Images

But, lawmakers upset with her handling of Britain's scheduled departure from the EU sought to topple her from power on Wednesday. "Higher volatility lowers sterling — that's been the story over the last two years," Kallum Pickering, a senior U.K. economist at Berenberg, told CNBC on Wednesday. "In the long-term, I think sterling is still undervalued. But in the short-term, the risks are decidedly tilted to the downside," Pickering said.

No-confidence vote is 'merely a side show'

Graham Brady, the chairman of the backbench 1922 committee of Conservative lawmakers, announced Wednesday morning that at least 48 party members had sent him letters of protest — the number required to trigger a vote on her leadership. A ballot will now be held between 18:00 and 20:00 London time Wednesday evening, the 1922 Committee said in a press release. Sterling initially dipped into negative territory on the news, before climbing as market participants bet May would win the vote and, in the process, isolate lawmakers in her party pushing for a sudden break from the EU.