The pound retreated from a one-week high on Wednesday as British Prime Minister Theresa May returned to Brussels to try to salvage her Brexit deal.
If May cannot persuade European Commission chief Jean-Claude Juncker or the British parliament to modify her deal, Britain could crash out of the world's biggest trading block in 37 days.
The key sticking point is the so-called backstop, an insurance policy to prevent the return of extensive checks on the border between European Union member Ireland and the British province of Northern Ireland. Uncertainty over those arrangements is weighing on the pound.
Sterling surged above $1.3 on Tuesday and enjoyed its biggest daily gain of the year against the dollar, partly on hopes of a breakthrough in the Brexit impasse.
But traders said those bets had been misplaced.
"In my view, I think they [the EU] could tinker with the language [of the deal] a bit, but whether it would be enough to convince 51 percent of MPs to vote for it is dubious," said ACLS Global chief strategist Marshall Gittler.
"Personally I’d go short on the pound if I were taking a position," he added.
Sterling fell 0.3 percent against the dollar to $1.3026. Against the euro, the British currency also weakened 0.3 percent to 87.12 pence per euro.
A spokesman for May called the Brussels trip "significant" but an aide for the EU's Juncker said he did not expect a breakthrough.
Recent wild swings in the pound against both the dollar and the euro have underlined the sensitivity of sterling ahead of Brexit.
Investors are skittish because May has yet to win parliamentary support for her deal with only about six weeks until Britain is due to leave the bloc.
Derivative markets were cautious, with two-month pound risk reversals, a gauge of calls to puts on the British currency, hovering near three-month lows.
That is a sign of investor caution about the pound's outlook in the near-term.
Pressure on May to end the uncertainty for business has increased after Honda's decision this week to close its British car manufacturing plant. (Reuters)