The pound has taken a tumble following weekend reports that Prime Minister Theresa May is facing a 40-strong rebellion from her Conservative backbenchers.
Sterling was down 0.8% against the US dollar at 1.308, with the Sunday Times reporting that a group of MPs had signed a letter of no confidence in Mrs May.
The fresh bout of political uncertainty also weighed on the pound’s performance versus the euro, dropping 0.6% to 1.123.
Mrs May’s fragile grip on power, relying on DUP votes for a Commons majority, means the Government is vulnerable to any Tory rebellion.
Neil Wilson, ETX Capital analyst, said: “Reports indicating Prime Minister Theresa May is facing a 40-strong rebellion from her own backbenchers has traders cautious on the pound’s outlook; but for now the currency is just about keeping its head above water.
“The 40 MPs is short of the 48 required to force a vote on her leadership and with Labour looking strong, going to the country again is the last thing most Conservative MPs want.
“Nevertheless, investors are rightly exercising caution on sterling given the risks with regards to the Brexit process.
“If the market decides the UK cannot meet the EU’s demands in time it could send the pound sharply lower, perhaps to $1.25 or below before the deadline is reached.”
The market reaction comes as Mrs May gears up to meet business leaders from Europe to discuss the future of UK-EU trade post-Brexit.
During the event, organised by the Confederation of British Industry (CBI), she will set out her vision of a “bold and deep economic partnership” between the UK and EU in an attempt to help move the negotiations on to trade talks.
While the pound suffered during morning trading, the FTSE 100 Index was up 7.4 points to 7,440.31.
David Madden, market analyst at CMC Markets, said: “The slide in sterling has helped push the FTSE 100 higher.
“The British equity benchmark is benefiting from the pressurised pound as the chatter of a vote of no-confidence against Prime Minister May is doing the rounds.”