The pound slipped 0.3% to a low of $1.2656, bringing losses since early-May to about 4.5%. Against the euro, however, sterling firmed to approach one-week highs, trading at 89.26 pence. The currency had fallen to nearly six-month lows last week.

Adding to sterling weakness are worries that Britain might still leave the European Union with no transition agreements in place. Jeremy Hunt, in the running to become Conservative Party leader and the new U.K. prime minister, is due to say later in the day that he is willing to countenance a no-deal Brexit.

Moreover, "the market is concerned that whoever wins the Conservative leadership will not have much time to get something different from (Theresa) May's deal" to put in front of the U.K. parliament, said Athanasios Vamvakidis, global head of G10 FX strategy at Bank of America Merrill Lynch.

Traders are also awaiting the latest reading of the U.K. manufacturing purchasing managers' survey for June, expected to come in at 49.2, versus 49.4 in May. However, while overall economic data has been poor recently, this is largely reflected in sterling's exchange rate.

Investors remain reluctant to take big positions in the pound, with both hedge funds and real money investors broadly short on the currency after trimming long positions since March. Latest positioning data from the Commodity Futures Trading Commission (CFTC) showed short sterling position rising slightly in the week to Tuesday.

"We don't see much flow because it's hard to have a strong view (on sterling)," Vamvakidis said.