Sterling snapped a three-day rising streak and slipped today as concerns rose that Britain may be headed for a protracted Brexit delay.
The upper house of Britain's parliament started debating legislation to force Prime Minister Theresa May to seek a Brexit delay to prevent a potentially disorderly departure on April 12 without a deal.
This comes after the lower house of parliament approved the bill by a single vote.
May also began talks with opposition lawmakers to forge a cross-party consensus to break the Brexit deadlock, but Labour leader Jeremy Corbyn said she had not moved far enough in a first round of crisis talks.
UBS Global Wealth Management said it foresees a long extension to Article 50 as it expects May's attempt to build a cross-party consensus unlikely to succeed and expected the pound to remain volatile.
"Until some clarity emerges, UBS does not advocate taking directional views in sterling and advises investors to hedge downside risk," UBS said.
The pound fell 0.2% to the day's low at $1.3134. Against the euro, it weakened 0.1% to 85.48.
While political developments this week indicated lawmakers are increasingly reluctant to go for a hard Brexit, the lack of clarity on an alternative plan has weighed on the pound.
"Yesterday's events indicated a further narrowing of the options and longer odds on a hard Brexit but we are still far away from a solution, which is capping the pound's gains," said Neil Mellor, a senior currency strategist at BNY Mellon in London.
The legislation, put forward by senior Conservative and opposition Labour lawmakers, was rushed through the House of Commons in less than six hours.
It was approved at the final stage by 313 votes to 312. It now has to pass the upper chamber, the House of Lords.