British pound rallies back, turns positive even after lawmakers vote down May's Brexit deal

The British pound rallied back from a sharp drop on Tuesday as traders digested a UK parliamentary vote that shot down a proposed Brexit deal from Prime Minister Theresa May.

As of 3:21 p.m. ET, the pound was up marginally at $1.2868 against the dollar. The currency had fallen more than 1 percent immediately after the vote. However, the pound regained its losses as traders bet the possibility of a hard Brexit were decreasing.

"Most people are dramatically reducing the odds for a no deal Brexit therefore there will be some deal of some sort," said Peter Boockvar, chief investment officer at Bleakley Advisory Group. "There are so many scenarios with no percentage odds leaning in any one direction. That's why it's hard to game out what's next. Most people think the smallest odds are a no hard exit Brexit. That is why the pound is hanging in. It's almost getting back to unchanged."

The deal needed support from more than half of the UK parliament. Instead, 432 lawmakers voted against it while just 202 voted in favor of the deal.

May proposed a deal that included a "Withdrawal Agreement," which sets the terms of the UK-European Union divorce, and a "Future Relationship" document. The latter is a draft on how the United Kingdom and the EU would interact following the break-up. The deal was previously approved by May's government and European heads of state.

The government now has just three working days in the parliament to present a revised deal.

Jeremy Corbyn, the leader of the Labour Party, called for a vote of no confidence in the government to be held on Wednesday. If May loses that vote, she will be forced to resign. May, however, is not expected to lose that vote.

"We're looking at a stop the clock scenario. The stop the clock both from the standpoint of Brussels allowing an extension beyond March 29 because it's not in their interest to have a crash out and a stop the clock on the part of the parliament in the UK because it's not in their interest to precipitate a crash out either," Catherine Mann, global chief economist at Citi, told CNBC's "Closing Bell."

"So there's going to be a stop the clock. The question is what the implication of that might be for real investment and other decisions that are being made by businesses within the UK," Mann added.

However, European Council President Donald Tusk said a new deal is "impossible."

Jean-Claude Junker, president of the European Council, later urged the UK to "clarify its intentions as soon as possible. Time is almost up."

UK citizens voted in favor of leaving the European Union in June 2016, a decision that sent ripples across global financial markets. Since then, the pound is down more than 14 percent against the U.S. dollar.

—CNBC's Sam Meredith , Patti Domm and Michelle Fox contributed to this report.

Subscribe to CNBC on YouTube.