The pound has given up the gains made since the general election after Boris Johnson said he would write Britain’s exit from the EU next year into law without an extension in the transition period.

Sterling tumbled by about two cents against the dollar and the euro on the international money markets, as the decision to enshrine time-limited Brexit negotiations into law caught investors by surprise.

The pound came under heavy selling pressure on the foreign exchanges, falling to about $1.31 against the dollar and to about €1.18 against the euro, reversing all the post-election gains made since Thursday evening last week.

Johnson’s move set alarm bells ringing in the City, where bosses and investors have largely been anticipating that the year-long Brexit transition period until the end of December 2020 would likely be extended.

Should ministers fail to agree a deal by the end of next year, Britain would likely exit the EU and continue a relationship with its most significant trading partner on World Trade Organization terms, a move investors in the City believe would damage the UK economy.

The Confederation of British Industry, the country’s leading business lobby group, warned ministers that the speed they were taking to reach an agreement must not compromise quality.

It added: “The economy cannot afford another no-deal cliff-edge in December 2020 and needs a deep and ambitious deal that protects the UK services and secures the necessary regulatory cooperation for the industries that need it.”

Investors had expected the currency to come under pressure next year as Johnson faces the complex process of striking a far-reaching trade deal with the EU in less than a year. Most international trade deals take much longer to agree.

Joshua Mahony, senior market analyst at the financial trading firm IG, said: “With Johnson introducing yet another needless cliff-edge, he has dented hopes of a sentiment driven boost in economic activity which has in turn put an end to the recent recovery in UK markets.”