Fears that Britain will end its post-Brexit transition period without agreeing any trading arrangements sent the pound to new five and a half month lows today.
The Brexit news overshadowed data showing the economy recovering and news of a new trade deal with Japan.
The pound is set for its worst week against the euro and the dollar since the middle of March, when the Covid-19 pandemic selloff was at its height, having lost around 4% against both currencies.
Sterling was down 0.6% against the euro at 0.9285 pence today and 0.3% lower against the dollar at $1.2770.
That followed reports that Brussels has stepped up planning for a no-deal Brexit after Prime Minister Boris Johnson's government refused to revoke an ultimatum on breaking the divorce treaty which Brussels says will sink four years of Brexit talks.
"The probability between a deal and no-deal are definitely shifting towards a no deal - that is very clear," said Klaus Baader, global chief economist at Societe Generale.
"The risk of a no-deal is increasing every day," he said.
Morgan Stanley said the risk of Britain exiting its transition period on "WTO terms" had risen to 40% compared to 25% earlier.
News that Britain had struck its first post-Brexit trade deal with Japan failed to give a lasting boost to the currency. Britain said the deal meant 99% of its exports to Japan would be tariff-free.
A set of positive data for the UK economy also failed to cheer traders.
The Office for National Statistics reported that UK economic output expanded by 6.6% in July after crashing by a record 20% in the second quarter.
The economy grew for the third month in a row in July as pubs, restaurants and other sectors reopened but it still remained around 12% smaller than its pre-pandemic level.
