The pound has tumbled sharply after the government indicated Boris Johnson was planning legislation to prevent the Brexit transition period being extended beyond the end of next year.

The move, which will be widely seen as an ultimatum to Brussels, was viewed by financial markets as placing the country at greater risk of leaving the bloc without an agreement on a future relationship.

Sterling's fate since the 2016 referendum has largely depended on the likelihood of a no-deal Brexit.

The pound had enjoyed a bounce in the run-up to the election as Mr Johnson secured his new Brexit deal with Brussels - later locking in control of UK's agenda following the general election.

It reached 19-month highs against the dollar and levels not seen against the euro since July 2016 on Thursday night and into Friday as the scale of his parliamentary majority became clear.


It hit $1.35 and €1.21 before falling back since as investors focused on the cooling of the US-China trade war and other developments that supported the US currency in particular.

But the pound lost two cents against both after a Downing Street source confirmed on Monday night that the EU Withdrawal Bill was being altered to outlaw any transition period extension beyond 2020.

It was trading close to $1.31 and below €1.18 in the wake of the announcement - wiping out all of the gains seen since last week's general election.

Markets climb after Tory election win

The FTSE 100, which has also enjoyed a post-election bounce to levels not seen for four months, failed to build on those gains on Tuesday, ending little changed on its opening position.

Among the companies holding it back was Unilever - the consumer goods giant - following a downgrade in sales expectations mostly linked to its Asia operations.

Its shares were 7% lower.

UK-focused stocks were also under pressure following days of strong gains with housebuilders and banks taking a hit as investors reflected on the Brexit developments.

Lloyds Banking Group lost 6% while RBS fell 3% and Barratt Developments shares were 2% off.

The lower tier FTSE 250, which hit record levels on Monday, was closed 1% lower.

Mr Johnson's tougher stance may reflect comments by the EU's chief Brexit negotiator, which emerged just 24 hours before the UK went to the polls.

Michel Barnier had been recorded on tape telling diplomats that it would not be possible to secure a trade deal in an 11-month window.

Barnier: Trade deal cannot be done in under a year

Dame Carolyn Fairbairn, the director-general of the CBI said of the PM's plan: "Business has had enough of uncertainty and shares the Prime Minister's ambition for a fast EU trade deal.

"With only a year to go, we are committed to working with the government to secure an ambitious deal that supports all sectors of the economy. Every step in the negotiations will have an impact on jobs, firms and communities."

Commenting on the market reaction Jasper Lawler, head of research at London Capital Group, said: "There was a line of thinking that his huge majority in parliament would allow Boris to get away with reneging on his promise not to extend.

"That idea now needs to be scrapped. We are now waiting for the other shoe to drop - that Boris will not pursue a softer Brexit just because he has a large majority and some new MPs from constituencies with manufacturing jobs.

"That being said, we remain positive on sterling. The withdrawal agreement finally getting passed in parliament, possibly this Friday should help the pound get its mojo back."