Sterling fell against the dollar and the euro on Thursday after a report that Britain and the European Union were still far apart on the key issue of state aid in Brexit trade talks.
The news moved the pound. At 0801 GMT, sterling was down 0.3% versus the dollar at $1.2886, and down around 0.2% versus the euro at 91.08.
A gauge of sterling overnight volatility rose to its highest since March.
“I suggest there is further downside ahead for the pound on this news,” said Neil Jones, head of FX sales at Mizuho, who said sterling could retreat towards $1.27.
“A no deal is looking more likely than expectations over the last couple of weeks as sentiment in favour a deal was shaping up nicely,” he said.
“These headlines do elevate concerns,” he added.
This week’s round of Brexit talks is the last scheduled so far and EU leaders will again assess progress on Oct.15-16.
Reporting by Elizabeth Howcroft; editing by Simon Jessop