Sterling extended losses to hit a two-week low against the dollar on Wednesday, undermined by signals that the Bank of England might be preparing to join its central bank counterparts in cutting interest rates to shore up a worsening economic outlook.
UK government bond yields fell sharply on Tuesday after BoE Governor Mark Carney flagged uncertainties stemming from trade disputes and Britain's departure from the European Union.
Markets interpreted the comments as dovish, especially as they followed dismal construction PMI data, pushing 10-year gilt yields under the BOE policy rate of 0.75% for the first time in a decade.
In another sign of market concern, two-year yields fell under five-year one for the first time since August 2008, the curve inversion that can herald an economic downturn.
"Sterling is under pressure as it looks like the BoE is lining up a more realistic view on Brexit. If Brexit is delayed again it looks like Carney is potentially teeing up a rate cut," said Colin Asher, senior economist at Mizuho.
The pound was down 0.2% at $1.2565, having fallen earlier to a low of $1.2558. Against the euro, sterling declined by 0.1% to 89.68 pence.
Traders are now waiting to see if the UK services purchasing managers' survey follows the path of the manufacturing and construction PMIs, which fell further into contraction territory last month. The services PMI is expected at 51 in June, steady from May.
Markets also remain concerned over Britain's chances of striking a Brexit withdrawal deal with the EU before the Oct. 31 departure deadline.
The governing Conservative Party is due to name either Boris Johnson or Jeremy Hunt as prime minister on July 23, but analysts say the new incumbent is unlikely to have enough time to renegotiate a deal with Europe before Halloween.