The British pound firmed against the dollar and euro yesterday and London stocks dropped, as traders awaited a confidence vote on British Prime Minister Theresa May's government after parliament voted massively against its Brexit deal.

The pound’s rise “would appear to reflect some expectation that... the prospect of no-deal may have been diminished”, said Bank of England governor Mark Carney.

The rising pound tends to weigh on London’s benchmark FTSE 100 index since it features many multinationals who earn vast sums in dollars and euros.

London’s second tier FTSE 250 was up slightly. Featuring mostly companies operating in the UK, the 250 index is along with the pound seen as a clearer indicator of Britain’s future economic health.

“Many people may be surprised that the pound is holding firm and the UK-heavy FTSE 250 index is rising off the back of Theresa May’s Brexit vote defeat,” noted Russ Mould, investment director at stockbroker AJ Bell.

Sterling had tanked to a near two-year low soon after the government’s proposal on leaving the European Union was soundly beaten late in London on Tuesday, but it soon bounced back as traders bet there would not be a no-deal exit.

With Ms May expected to win a vote of no confidence called by the Opposition Labour Party yesterday, talk will move to what happens next.

“If we saw May win out, which I think we probably will, then the pound is probably likely to stay as it is, with a lack of direction,” said IG analyst Joshua Mahoney.

“If she was to lose it, there would be a lot of volatility and uncertainty coming into play and that would be very negative for the pound,” he told AFP from a relatively calm trading floor in London.

Analysts said Ms May could ask to delay Britain’s March 29 exit from the bloc as she looks for a more palatable agreement from her EU peers, while there is growing speculation of a general election and even another referendum.

In Brussels, EU chief negotiator Michel Barnier warned “the risk of a no deal has never seemed so high”.

Earlier in the day, Asian equity markets diverged after Tuesday’s rally that was fuelled by China's plans to cut taxes in a bid to support the country’s stuttering economy.

However, traders are growing increasingly worried about the lack of movement in the US over the government shutdown, which is now in its fourth week, with both sides digging their heels in.