The pound erased earlier gains today as investors refocused their attention towards Brexit talks and a European Central Bank policymaker said Britain could crash out of the EU without a deal in place by the end of 2020.
Sterling's weakness came despite riskier assets recouping earlier losses on some hopes that Iran's missile strikes on US forces in Iraq would not lead to a wider regional conflict.
Iran said it had fired 15 missiles at US targets in Iraq early today in retaliation for last week's US drone strike that killed Iranian commander General Qassem Soleimani, stoking fears of a new war in the Middle East.
Though the Japanese yen initially gained and global stocks tumbled after the attacks, market fears faded on some hopes the raid would not lead to an immediate military escalation, pushing risky assets including the pound higher.
But those gains proved to be short-lived as investors resumed selling the pound near $1.32 levels against the dollar.
"If the US-Iran situation calms, as it looks it might, then focus will return to Boris Johnson's meeting with the European policymakers and the tone of any comments that will follow," said John Marley, a senior FX consultant at FX risk management specialist, SmartCurrencyBusiness.
Britain is due to leave the bloc on January 31 and the sides will then have until the end of the year to negotiate a new trade relationship - a short period given the complexity of the discussions.
A hard Brexit at the end of 2020 remains a possibility and could cut deep into foreign trade, much as if Britain were to leave the EU without a deal, European Central Bank policymaker Klaas Knot said today.
British Prime Minister Boris Johnson will tell European Commission Chief Ursula von der Leyen today that Britain will not extend the transition period beyond December and is not seeking a new relationship based on alignment with existing rules.
Sterling, which was up as much as 0.3% earlier, erased most of its gains and traded flat at $1.3129, moving further away from a two-week high of $1.3284 hit on December 17.
Against the euro, the pound stepped back from the day's highs to trade 0.2% stronger at 84.74 pence.