Sterling slipped below $1.27, its weakest level since June 2017, as the dollar extended its recent rally and investors prepared for British inflation data due on Wednesday.
After falling to as low as $1.2693 in Asian trading, sterling recovered to $1.2710, down 0.1 percent on the day against a broadly stronger dollar.
Against the euro, the pound rose 0.2 percent to 89.05 pence per euro.
Year-on-year consumer price inflation, due at 0830 GMT, for the month of July is expected to show a rise of 2.5 percent, according to a Reuters poll, up from 2.4 percent in the previous month.