Sterling fell 0.2% today as traders assessed the risk of a hard Brexit at the end of the year, with political news expected to take precedence over economic data.
Prime Minister Boris Johnson's government this week ruled out an extension to the December 2020 deadline for negotiations on a trade deal with the European Union.
This created a new Brexit cliff-edge and cut short sterling's post-election rally.
The pound fell on the news and has collapsed more than 3% from an 18-month high of $1.2516 struck after Johnson's landslide victory in Thursday's general election.
It was last down 0.2% versus the dollar, at $1.3105. Against the euro it was down around 0.2% at 85.02 pence.
"This is a correction of the election euphoria, slowly but surely, as the realisation sets in that this whole Brexit drama is not over yet and just another deadline of a hard Brexit will be looming eventually at the end of the year," said Thu Lan Nugyen, FX strategist at Commerzbank.
She said Brexit had come back onto the agenda more quickly than she had expected.
Johnson's Withdrawal Bill is due to be debated in parliament, where he now has a majority, on Friday.
Nguyen put an 80% probability on the chances of the plan to outlaw an extension to the negotiating period passing.
She said it was too early to assess the renewed risk of a hard Brexit, but the fact that Johnson missed his October 31 "do or die" deadline for exiting the EU suggests that this December 2020 deadline could also be extended.
This means Brexit will be in focus at the Bank of England's meeting tomorrow.
Bank of England Governor Mark Carney warned yesterday that monetary policy tools risk becoming ineffective unless there is better cooperation from governments on trade and fiscal policy.
"Recent economic data releases from the UK suggest that the Bank of England will maintain a cautious stance tomorrow despite some grounds for optimism following the election," MUFG analysts wrote in a note to clients.