Sterling fell more than 1 per cent against the dollar on Tuesday as fears grew that Britain was preparing to undercut its Brexit divorce treaty and torpedo trade talks with the European Union.
The latest round of negotiations started on Tuesday, with Britain warning Brussels that it was ramping up preparations to leave without an agreement.
The EU has warned there will be no trade deal if Britain tries to override parts of the Withdrawal Agreement it signed in January. Such a move could jeopardise the whole treaty and create frictions in British-ruled Northern Ireland.
Sterling took another step lower after the head of the British government's legal department quit. Newspapers reported he had left in response to suggestions that Prime Minister Boris Johnson was threatening to override the divorce deal.
The clock is ticking on an October deadline for a trade deal and the end of the status quo transition arrangement in late December.
"From today, it seems to me that the 'no-deal' is the most possible and probable – the only outcome – of the negotiations," former European Commission chief Jean-Claude Juncker told a virtual summit on Tuesday hosted by Principal Global Investors.
"We should not forget that Brexit is a tragedy for everyone. It is a disaster. It is a move, taken by the British people, against history ... all of us, we will have to face negative consequences if there is no deal."
After several months of sterling rallying against the dollar, the sudden return of fears about a no-deal Brexit has frightened investors and knocked 4 cents off the pound since the start of the month.
The pound dropped 1.1 per cent to $1.3034, its weakest since August 13, while it also fell heavily against the euro to a two-week low of £0.9042.
"I sense participants are turning bearish on elevated chances of a no-deal Brexit but do not have a short position or hedge on board to reflect the view," said Neil Jones, head of hedge fund sales at Mizuho.
"We should be in store for a further pound sell-off."
However, Gavin Friend, senior FX strategist at NAB, noted that while the pound had fallen, it was not a large move.
"Why is sterling not falling faster than it is?" he said.
"There is a common view that lots of observers of the trade negotiations see all of the bluster we have been going through the last couple months as negotiating tactics."
Implied sterling-dollar volatility also rose, with one-month volatility, the contract encompassing the early-October deadline for a deal, hitting 10 per cent for the first time since mid-June.
