Sterling has plunged to a 27-month low against the dollar today and hit new six-month lows against the euro.

The UK currency extended losses as the two candidates to be Britain's next prime minister vied to outgun each other on taking a harder Brexit stance. 

Their positions appear to be leading markets to price a sharply higher risk of Britain leaving the European Union on October 31 without any transition trading agreements in place. 

That would potentially force the Bank of England to cut interest rates to stave off economic catastrophe. 

Sterling which already fell 0.5% yesterday is now headed for its biggest one-day fall since March.

The losses come after Boris Johnson and his rival to be Conservative Party leader, Jeremy Hunt, said last night that they would not accept the Northern Irish backstop element of Theresa May's Brexit deal. 

Both are trying to appeal to the majority of the Tory party members who are keen to make a clean break with the EU. 

The backstop is one of Brussels' principal demands in Brexit negotiations. If implemented, the UK would follow many EU rules until arrangements are made to avert a hard border. 

Sterling weakened by 0.8% today to $1.2409 - the lowest since April 2017 and mirroring the "flash crash" on January 3. 

Against the euro the pound fell 0.5% to a low of 90.42 pence - the lowest since January 11.

The sterling weakness extended even after UK employment data showed average weekly earnings unexpectedly rose 3.4% year-on-year in the three-months to May. 

However, the labour market strength is widely attributed to employers hiring workers who they can later lay off if needed. 

And employment growth slowed to post the weakest increase since the three months to August last year, in a sign that labour market may soon start feeling the heat. 

Money markets are now pricing a roughly 50% chance of a Bank of England rate cut by end-year, having increased their bets after recent comments by governor Mark Carney were viewed as dovish. 

But despite the clock ticking down to October, most investors believe a deal will eventually be reached. 

Only 20% of respondents surveyed by Bank of America Merrill Lynch expect the UK to leave the EU on or before the current October deadline and about 60% put the probability of a no-deal Brexit below 40%.