The pound sank after the government’s senior law officer said the legal risk of the UK being tied to EU rules after Brexit “remains unchanged”.
Currency traders fear that the attorney general’s advice means Theresa May’s revised Brexit deal is less likely to be accepted by pro-Brexit MPs.
According to Geoffrey Cox, the UK may not be able to leave the Irish backstop without the EU’s agreement.
The pound fell from £1.17 to £1.15 against the euro in a few minutes.
Sterling also fell two cents against from £1.32 to £1.30 against the dollar.
Mr Cox’s advice is likely to weigh heavily on MPs when parliament votes on the new version of the deal on Tuesday.
Simon Derrick, managing director of BNY Mellon, said the fall in sterling reflected increased uncertainty over the Brexit process.
“The market believes it increases the likelihood of a ‘no’ vote tonight,” he said.
“It complicates the issue, it leaves us with the possibility still of a no-deal Brexit, and uncertainty over politics more generally. It muddies the water.”
Mr Derrick said if the prime minister’s deal was defeated by only a narrow margin in Tuesday’s vote “that might encourage optimism” that a tweaked deal could be agreed before the end of the month.
However, a substantial defeat for the prime minister was likely to push sterling lower, he said.
“When the deal was originally defeated in January, sterling traded down at $1.26 . You could see it move lower again,” said Mr Derrick.
Theresa May said she had achieved “legally binding” changes to her Brexit deal which addressed the possibility of the temporary divorce arrangement known as the “backstop” becoming permanent if the UK wished to end it.
The pound sank after the government’s senior law officer said the legal risk of the UK being tied to EU rules after Brexit “remains unchanged”. Currency traders fear that the attorney general’s advice means Theresa May’s revised Brexit deal does not deal with objections from pro-Brexit MPs.