Both candidates to lead the governing Conservative party - former London mayor Boris Johnson and foreign secretary Jeremy Hunt - have promised to increase spending and cut taxes.

But finance minister Philip Hammond said a no-deal Brexit would swallow up the 27-billion-pound ($34 billion) fiscal war-chest that he had built up. The deadline for Britain to leave the EU is Oct. 31

Traders are also positioning for June's construction purchasing managers' survey, expected to come in at 49.3 versus 48.6 in May, after data on Monday showed manufacturing PMI plunging to a six-year low.

The pound was down 0.16% at $1.2619. It has lost 0.6% of its value against the dollar over the past week. Against the euro, sterling fell by 0.2% to 89.47 pence.

Marshall Gittler, chief strategist at ACLS Global, said weak data could also drag on sterling if it diluted the Bank of England's current hawkish policy bias.

"UK manufacturing PMI has fallen to levels that in the past has been consistent with a cut in the BOE base lending rate. We'll have to see if they maintain their tightening bias at their next meeting," he told clients.

BOE Governor Mark Carney is due to speak at 1300 GMT.

Dollar strength, following a U.S.-China trade truce at the weekend G20 summit, has added to the pound's downward move.

Implied sterling-dollar volatility - the gauge of expected swings in a currency - eased to two-week lows of 8.95 vol  for the six-month contract encompassing the Brexit deadline. However, this has risen from 7.4 vol in mid-April, reflecting unease over how Britain's departure pans out.

Investors remain reluctant to take big positions in the pound, with both hedge funds and real money investors broadly short on the currency. Data from the Commodity Futures Trading Commission (CFTC) showed short sterling position rising slightly in the week to last Tuesday.