The pound has slumped as investors bet on the growing likelihood of the UK leaving the Brexit transition period at the end of December without a deal, amid reports that Boris Johnson’s government is preparing to override the EU withdrawal agreement signed with Brussels in January.

Sterling fell about 1% against the US dollar on Monday to trade below $1.32, and fell by a similar amount against the euro to below €1.12 on the international currency markets.

The renewed selling pressure on the pound comes after leaked reports on the eve of the latest round of Brexit talks this week, in the final set of negotiations before a de facto deadline for a trade deal between the UK and the EU next month.

“The Brexit heat is back on and sterling is, in our view, unprepared,” said Petr Krpata, a currency analyst at the Dutch bank ING, warning the pound could reach parity with the euro within weeks if the Brexit talks deteriorate further.

Raising the temperature in the talks, Johnson is expected to put an ultimatum to negotiators this week, saying an agreement must be reached by 15 October or Britain will walk away for good. The Financial Times also reported that the government was preparing to publish legislation on Wednesday that would intentionally try to unpick parts of the EU withdrawal agreement signed in January.

Jim Reid, a research strategist at Deutsche Bank, said the chances of a trade deal being agreed between the UK and the EU appeared to be rapidly fading. “This has certainly raised the stakes at a fraught time in talks. The UK seem to be briefing hard in the media that they are quite prepared to walk away from talks if no progress is made.”

City investment analysts said the latest developments could be an attempt by the UK to apply maximum pressure on the EU at the onset of talks, before both sides come to a compromise at a later date. Krpata said: “After all, we saw similar fireworks this time last year, only for a deal to materialise weeks later.”

However, investors said Johnson could take a tougher Brexit stance because his reputation with backbench Tory MPs has been damaged by his handling of Covid-19. Gilles Moëc, the group chief economist at AXA Investment Managers, said: “Getting Brexit done by year-end with a minimum of concessions to the EU is probably now a matter of political survival for Boris Johnson.

“So, the probability of a no-deal Brexit continues to increase, unfortunately.”