On Wednesday, May said she had obtained enough support from her senior ministers for her draft Brexit deal to move forward. This came after she also received support from officials at the EU earlier in the week.
But by Thursday morning a short flurry of ministers decided to resign from their positions in protest at her proposals. Raab, in a letter to the U.K leader, said he couldn't accept the deal after the promises the ruling Conservative Party made to the country in an election manifesto last year.
A junior minister for Northern Ireland, Shailesh Vara, the Work and Pensions Secretary Esther McVey and Suella Braverman, a junior minister in Britain's Brexit Department, also submitted their resignations on Thursday morning. By lunchtime, notable Euroskeptic lawmaker Jacob Rees-Mogg said that a number of letters of no confidence had been submitted which could potentially force a vote within the party on her leadership.
Sterling plunged to $1.2833 from around $1.2994 at around 9:00 a.m. London time, following news of Raab's resignation. The currency had a volatile overnight session driven by uncertainties surrounding the fate of May's draft Brexit deal in the U.K. Parliament. By 10:20 a.m. London time, sterling was down by nearly 2 percent, trading at $1.2752.
May told the U.K. Parliament Thursday that Britain can either choose to leave with no deal, risk not having a Brexit at all, or choose to unite and support the best deal that could be negotiated. She added that withdrawing from EU membership and establishing a new relationship is complex and requires "hard work."
Many lawmakers have concerns over the deal which range from the agreements for the border between Northern Ireland and the Republic of Ireland, to how long the U.K. will remain in a customs union with the EU — which could potentially stifle future trade deals it could make. Market watchers have serious doubts over whether this draft withdrawal agreement will get parliamentary approval in the country.
Meanwhile on Thursday morning, the U.K.'s opposition Labour party said the government was falling apart and May had no authority after these latest resignations. Commenting on the resignation of Raab, Scottish National Party lawmaker Ian Blackford said: "With ministers falling like dominoes, it's clear the prime minister lacks the confidence of her cabinet — and has no hope of commanding a majority in Parliament for her bad Brexit deal."
British bond yields fell across the board as the latest Brexit headlines boosted demand for safe-haven assets.
"Raab resigning just now changes the ballgame. Hard to be optimistic on GBP in the short term. But equally Theresa May has survived much worse. It's whether we get a flood of resignations to follow," Jordan Rochester, a global foreign exchange strategist at Nomura, said in a research note to clients Thursday.
"The news flow looks to be turning materially against Theresa May substantially. The market loves a narrative and he is a big resignation so hedging flow (for the parliament vote/leadership threats) will see GBP head lower," Rochester said.
He added that this volatility could be short term, however. "The end outcome is that Theresa May finds a way and the deal gets approved, the U.K. avoids the political pitfalls. But we're in for a messy way through the next few hours."
However, if the deal sees parliamentary passage, the currency could hit anywhere between $1.35 and $1.40, analysts told CNBC Wednesday.