Lawmakers who defeated Prime Minister Boris Johnson's government late on Tuesday are hoping to pass a bill on Wednesday which will seek to stop Britain from leaving the European Union on Oct. 31 without transitional arrangements.
Johnson, meanwhile, demanded an Oct. 15 snap election and is expected to table a motion for it on Wednesday.
Britain's opposition Labour Party said it will not back the vote to hold an early election.
The latest sterling moves take it further off three-year lows of $1.1959 hit before the parliament vote.
"The market will assume that the vote tonight passes," said Kit Juckes, macro strategist at Societe Generale, noting that the government's defeat in parliament had reduced the probability of a no-deal Brexit.
While that is positive for sterling, the prospect of further prolonging Brexit uncertainty "will reduce sterling's potential upside," he added.
Bank of England Governor Mark Carney said on Wednesday that a worst-case no-deal Brexit would inflict less severe damage on Britain's economy than previously thought because of preparations undertaken since the end of last year.
By 1545 GMT, sterling was up 0.8pc at $1.2189, having vaulted briefly to a one-week high of $1.2220 as it was boosted also by a 0.4pc dollar pullback sparked by Tuesday's dismal US manufacturing data..
Against the euro, the pound was up by 0.4pc at 90.48 pence .
Sterling volatility gauges also eased, with two-month implied vol, a contract capturing the Oct. 31 Brexit deadline, falling from three-year highs reached on Tuesday.
Appetite for sterling was not dented even by weaker-than-expected services purchasing managers' (PMI) survey, though the figures came as a reminder that Britain's economy is in serious danger of entering its first recession since the financial crisis.
The PMI fell to 50.6 in August from 51.4 in July. A Reuters poll had forecast a smaller decrease to 51.
More big price swings are likely in coming days as the battle over Brexit enters another crucial phase.
Possible outcomes range from a turbulent no-deal exit to abandoning the whole endeavour.
The British currency is now the second worst performing major currency year-to-date, according to Refinitiv data.
Except for lows plumbed during an October 2016 "flash crash", sterling's Tuesday fall took it towards levels not seen since 1985.
That $1.05 record low could be breached if Britain hurtles into a no-deal Brexit, some reckon. But its current respite may also be short-lived, especially if a snap elections is called.
That would open up a new set of scenarios including the possibility of Labour leader Jeremy Corbyn becoming prime minister.
"Not only uncertainty about the election outcome (thus various possible Brexit options) remains high, but the most probable alternatives don't appear to offer much of a respite for sterling," ING analysts told clients.
"We see Brexit/early election as under-priced by the market and look for more downside to sterling," they added.