The pound plunged and then rallied against the euro after Theresa May’s Brexit deal was overwhelmingly rejected by Parliament.

Sterling fell 0.74 per cent against the euro to hit €1.1133 and 1.19 per cent against the dollar to hit $1.2711.

But it then recovered against the euro, rising 0.37 per cent to €1.1257.

And against the dollar it then jumped to $1.2830

MPs rejected the prime minister’s deal by 202 to 432.

The result was immediately followed by Jeremy Corbyn tabling a vote of no confidence in Theresa May.

The Chancellor Philip Hammond and the Business Secretary Greg Clark telephoned business leaders immediately after the vote to attempt to assure them that a Brexit deal was still achievable.

If a no-deal hard Brexit comes to pass, ING predicts sterling would tank to $1.12 and hit parity with the euro.

Some market watchers suggested that traders were anticipating a major government reversal of policy in the wake of the historic defeat for Ms May.

“Traders are seemingly taking the outcome as paving the way for an extension of the Article 50 deadline, rather than increasing the chances of a no-deal Brexit and this has caused the recovery seen in the pound,” said David Cheetham of XTB.

"Sterling has pared its earlier loss – this is not surprising. It raises the chances of a 'no Brexit' or, at the least, an extension of Article 50," said Seema Shah of Principal Global Investors.

"Admittedly, the chances of a no-deal Brexit may mathematically have also risen, but the market remains ever-hopeful that the government will not commit an error of such epic proportions."

Volatile sterling trading after May’s historic defeat

Reuters Eikon

But others suggested that the volatility was inevitable given the huge political uncertainty and the increased risk that the Government could fall.

“A confidence vote loss is not a sterling positive; international investors will see it as a negative for the pound given the uncertainty over the Labour party’s Brexit position and what a Corbyn government would mean for the UK economy,” said Jeremy Thomson-Cook, Chief Economist at WorldFirst.

“Sterling is living on borrowed time and could benefit from the government ruling out no-deal.”

Carolyn Fairbairn, the CBI director general, said that Ms May now needed a “new plan”.

“Every business will feel no deal is hurtling closer. A new plan is needed immediately,” she said.

“This is now a time for our politicians to make history as leaders. All MPs need to reflect on the need for compromise and to act at speed to protect the UK’s economy.”

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That message was echoed by Huw Evans, of the Association of British Insurers.

“We need a way forward urgently that avoids no-deal,” he said.

“This is uncharted territory and we face a period of unprecedented uncertainty.”

“It is critical that the Government, Parliament and the EU work together to avoid an outcome that would be bad for our economies and bad for our customers.”