Signs that arch-Brexiteer Boris Johnson may be a step closer to becoming Britain's next prime minister sent the pound tumbling to a five-month low versus the euro today and towards $1.25 as investors worried about the risks of a disruptive Brexit. 

The pound dived to 89.74 pence against the euro, its lowest level since mid-January.

A second round of voting in the Tory leadership contest looks likely to cement frontrunner Johnson's pole position among rivals. 

Once the candidates are whittled down to the final two, the mainly pro-Brexit Conservative Party members will cast the deciding votes in July to select a leader to replace Prime Minister Theresa May.

Against the dollar, sterling dropped 0.2% to $1.2507, its weakest since January. 

Johnson has said he will take Britain out of the European Union by October 31 whether or not there is a deal with Brussels to smooth the transition. 

The pound has weakened more than 6% against the euro since early May as investors have raised their bearish bets against the British currency on worries that Britain may crash out of the European Union without a deal on October 31. 

Sterling staged a small recovery earlier as the euro sold off following comments from European Central Bank President Mario Draghi that raised the possibility of an interest rate cut to boost the euro zone economy. 

UBS wealth management said it believed fears of a no-deal Brexit at the end of October, the deadline for Britain to leave the EU, were overdone. 

Short bets against the British currency have been trimmed somewhat recently, but overall sentiment is fragile and recent optimistic talk from the Bank of England has done little to dispel the cloud of gloom hanging over the pound. 

While policymakers have said that benchmark interest rates may need to rise sooner than markets expect, traders are in no hurry to shift their expectations, with futures markets pricing in no rate hikes well into late 2020.

ECB chief Mario Draghi

Meanwhile, the euro erased earlier gains and fell across the board today after European Central Bank chief Mario Draghi said policymakers will provide more stimulus if inflation does not pick up. 

Against the dollar, the euro fell as much as 0.3% to a two-week low of $1.1182. It also dived to a one and a half week low against the Swiss franc. 

With benchmark euro zone interest rates already in negative territory and inflation expectations well below central bank forecasts, markets perceived Draghi's comments as quite dovish. 

Money markets are now pricing in one full rate cut of 10 basis points by the end of the year with core bond yields across the euro zone falling 5-10 basis points across the board. 

Themos Fiotakis, head of FX and rates strategy at UBS, said the main risk from Draghi's perspective is a stronger euro weighing further on inflation expectations. 

"So whatever the Fed outcome tomorrow, the ECB does need to fend off the notion that there is a lot more space to ease in other economies," Fiotakis said, referring to the Fed policy decision tomorrow. 

The euro's weakness propped up the dollar against a basket of its rivals before a US Federal Reserve meeting got underway with expectations growing the Fed will signal its first rate cut in a decade.

Analysts put the probability of a quarter-point interest rate cut by the Fed at 20%, with a 70% probability of a rate cut at its next meeting in July.