The pound bounced briefly Tuesday before falling back after arch-Brexiteer Boris Johnson was announced as Britain's next prime minister.
Johnson, who has vowed to take Britain out of the European Union on the October 31 deadline with or without a deal, defeated Jeremy Hunt in the race to become Conservative Party leader.
Markets had expected the result but the pound still got a brief boost once it was announced, before slipping lower to $1.24 in late London trade.
"Given that he's been the frontrunner for quite some time the immediate market reaction has been fairly quiet with the pound remaining under pressure and not far from its lowest level since April 2017 against the US dollar," noted David Cheetham, chief market analyst at XTB online brokerage.
"The fate of the new PM’s tenure and of the pound for the coming months will be almost solely determined by Brexit developments," he added.
"The question now is whether the pound can recover from its slump in the near-term or whether the risk of no-deal is just too great and every passing week is seen to take us one week closer to the cliff-edge," said analyst Craig Erlam at currency trading brokerage OANDA.
Johnson appears to be on a collision course with the 27 EU leaders over Brexit. Incoming European Commission president Ursula von der Leyen noted that "there are many different and difficult issues to tackle together. We have challenging times ahead of us."
While the EU signalled it wanted to work constructively with Johnson, it has also indicated that a deal reached by outgoing prime minister Theresa May and which British lawmakers have refused to approve, would not be renegotiated.
- Modest gains on Wall Street -
Earlier in the day, Asian markets closed higher, in part owing to speculation that top US and Chinese negotiators will hold face-to-face trade talks soon.
In midday US trade, the Dow Jones Industrial Average posted a modest gain on a batch of mostly solid earnings reports and a budget agreement between congressional leaders and the White House.
That deal is expected to boost federal spending by $320 billion and suspend the government's debt limit until after the next US presidential election in 2020.
Traders are now focusing on an upcoming Federal Reserve policy meeting at which the US central bank is expected to cut interest rates, with the main question being the size of the cut.
In Europe too, "market participants are now looking ahead to the upcoming European Central Bank meeting on Thursday," noted Fawad Razaqzada at Forex.com
"The markets will now be wondering whether it will instead talk up the prospects of loosening -– rather than tightening -– its monetary policy, and soon," he added.
On oil markets, prices were unchanged or slightly lower while traders kept tabs on the rumbling Iran crisis following its seizure of a UK-flagged tanker in the Gulf on Friday.
- Key figures around 1600 GMT -
Pound/dollar: DOWN at $1.2448 from $1.2476 at 2100 GMT
Euro/pound: DOWN at 89.62 pence from 89.85 pence
Euro/dollar: DOWN at $1.1156 from $1.1209
Dollar/yen: UP at 108.08 yen from 107.87 yen
London - FTSE 100: UP 0.6 percent at 7,556.86 points (close)
Frankfurt - DAX 30: UP 1.6 percent at 12,490.74 (close)
Paris - CAC 40: UP 0.9 percent at 5,618.16 (close)
EURO STOXX 50: UP 1.2 percent at 3,532.87
Tokyo - Nikkei 225: UP 1.0 percent at 21,620.88 (close)
Hong Kong - Hang Seng: UP 0.3 percent at 28,466.48 (close)
Shanghai - Composite: UP 0.5 percent at 2,899.94 (close)
New York - Dow: UP 0.2 percent at 27,217.32
Brent North Sea crude: DOWN 13 cents at $63.13 per barrel
West Texas Intermediate: UNCHANGED at $56.19