- Cox's legal advice on the tweaked deal is seen as crucial to whether the assurances May received on Monday are enough to give wavering U.K. lawmakers the confidence to give her deal the green light.
- A second vote on on May's deal is still due on Tuesday evening.
- Cox said Tuesday morning that legal risks to Brexit still remain despite the late-night concessions from the European Union on Monday.
Sterling fell sharply against the dollar on Tuesday after Britain's Attorney General Geoffrey Cox published his opinion on Prime Minister Theresa May's recently amended Brexit deal.
Cox's legal advice on the tweaked deal is seen as crucial to whether the assurances May received on Monday are enough to give wavering U.K. lawmakers the confidence to give her deal the green light. A second vote on May's deal is still due on Tuesday evening.
Cox said Tuesday morning that the legal risks to Brexit still remain despite the late-night concessions from the European Union on Monday. He added that the revised document did not give Britain any legal means of exiting the "Irish backstop" arrangements unilaterally.
The backstop is a mechanism to avoid restoration of the "hard" border between the Republic of Ireland and Northern Ireland that was erased with the 1998 Good Friday peace agreement between London and Dublin. Some U.K. politicians don't like the fact that the backstop, although intended as a last-resort, would mean the U.K. remaining within a EU customs union for an indefinite amount of time and unable to leave unilaterally.
"The legal risk remains unchanged that if through no such demonstrable failure of either party, but simply because of intractable differences, that situation does arise, the United Kingdom would have ... no internationally lawful means of exiting the Protocol's arrangements, save by agreement," Cox said in the statement.
The British currency plunged 1 percent to trade at $1.3012 by 11:30 a.m. London time Tuesday. It also slipped nearly 1 percent against the euro. By around 3:00 p.m. Tuesday afternoon it had retraced some of those losses and was trading at $1.3121.
May's deal has already been roundly rejected by U.K. lawmakers once, back in January, and faces another test on Tuesday evening. If lawmakers vote against the deal again, they will then get to vote on Wednesday and Thursday respectively on whether the U.K. should leave the 28-member bloc with no deal, or should request a delay to its departure, currently scheduled for March 29.
May needs to win over the most ardent Brexiteers within her own Conservative Party who belong to a euroskeptic European Research Group (ERG) and the Northern Irish party that supports her government and gives it a slim majority in Parliament, the Democratic Unionist Party (DUP).
By Tuesday afternoon, and after Cox's statement, the DUP and ERG indicated they would both reject the deal.
May resolutely defended her plan when speaking in front of the House of Commons just hours before the vote. "If this vote is not passed tonight, if this deal is not passed, then Brexit could be lost," a hoarse-voiced May said.
Analysts told CNBC Tuesday that sterling could fluctuate from $1.30 to $1.38, depending on the result of the vote.
"The move in GBP overnight (Monday) reflects the fact that May's plan is back in the running," Jane Foley, head of foreign exchange strategy at Rabobank, told CNBC via email Tuesday. "We could see EUR/GBP dipping to 0.84 initially and cable pushing to 1.34 if a deal was passed."
Sterling is down more than 5 percent over a 12-month period against the greenback, and is down more than 8 percent since the U.K. voted to leave the European Union in June 2016.
Jordan Rochester, a foreign exchange strategist at Nomura, told CNBC Tuesday that if the deal passes, it will be the "Eureka moment" and sterling could be trading around $1.38 on Wednesday. He, however, cautioned on it falling in the case of a rejection.
"If it fails, we'll see GBP fall on the back of short-term positioning being taken off. But the move would likely be capped to no more than 0.87 in EURGBP given Article 50 extension still leaves open the options of softer Brexit and people's votes in market pricing."
The U.K. Parliament will start voting at 7:00 p.m. London time on Tuesday and the results will be announced later in the evening. The U.K. is set to leave the European Union on March 29.
—CNBC's Holly Ellyatt contributed to this article.