The pound extended losses today and derivatives markets signalled more weakness as fears grow of a catastrophic no-deal Brexit should lawmakers hold firm in their rejection of Prime Minister Theresa May's divorce deal with the EU. 

Sterling tumbled to a one-week low at $1.305. It also weakened 0.5% to 87 pence against the euro.

Theresa May has asked European Union leaders to delay Brexit from March 29 until the end of June and said she was preparing for a third vote in the British parliament on the exit deal she arduously negotiated with Brussels. 

German Chancellor Angela Merkel has voiced readiness to back a short extension.

But traders are increasingly worried that, if the deal is voted down for a third time in parliament, a host of possibilities open up, none of which are positive for the pound in the short term. 

While banks' assessments of the probability of a no-deal Brexit remain low and have not changed in recent days, increased signs of unease are showing up in currency derivative markets. 

Risk reversals in the pound maturing in two weeks fell to their lowest levels since mid-December. This is measures demand as a ratio of call to put options; puts offering the right to sell at a certain price, and calls - the right to buy. 

Risk reversals maturing over one to three months registered bigger declines, falling to their lowest levels since November. 

In a sign of how much focus there is on Brexit headlines, an unexpected rise in retail sales data in February failed to elicit any meaningful reaction from the pound. 

Another source of support for sterling - expectations of an interest rate rise by the Bank of England - is also ebbing. 

The bank had been expected to raise rates once Britain exited the EU with a deal and transition period in place, but could be forced to ease policy instead in the event of a no-deal outcome. 

A market-implied gauge of rate hikes from the Bank of England indicates the possibility of a rate rise by December has dwindled to 18%, compared to 40% earlier this week. 

However, that also follows yesterday's US Federal Reserve meeting, which wiped out rate-rise expectations for the rest of 2019 and has sent global bond yields tumbling. 

The Bank of England kept interest rates steady today and said most businesses felt as ready as they could be for a no-deal Brexit. 

Strategists said the Bank of England's hands were broadly tied for now, given the ongoing Brexit negotiations. 

They expected the Bank of England to keep interest rates on hold for the rest of the year on the back of a pause by the United States and Europe.