It was also knocked by a wave of countries closing their borders to Britain as the UK prime minister Boris Johnson enforced tougher lockdown restrictions to fight a new variant of coronavirus. The spread of the new strain is thought to be up to 70% more transmissible.
Sterling, which last week hit highs not seen since mid-2018, nosedived fell as much as 2.4% to $1.3206 and 1.6% to €1.0864 as another missed deadline spooked traders. It was also sent lower as the dollar strengthened on the back of a $900bn (£678bn) stimulus plan to buoy the US economy.
Although Britain left the EU on 31 January, entering a transition period, it fully leaves the bloc on 31 December 2020.
The two parties had already missed their initial 13 December deadline to reach a Brexit deal one way or another, but agreed to continue negotiations with a new deadline of Sunday 20 December, which it has now also missed.
London is still in negotiations with Brussels over a number of issues from trade and migration, to fishing rights. If the UK does not seal a wide range of agreements with the EU, it will be forced into a no-deal — or hard — Brexit.
The fear is that without an agreement with the EU, there could be the creation of a hard border with customs, security and passport control between the UK's Northern Ireland and the Republic of Ireland.
It is deemed as unacceptable as it poses a threat to the balance brought by the 1998 peace process that ended 30 years of conflict between Irish Catholic nationalists and pro-British Protestant unionists.
WATCH: Post-Brexit talks grind on as fish spat threatens deal
Downing Street said on Monday afternoon that discussions on a post-Brexit trade deal were continuing in Brussels but that they “remain difficult” with “significant differences” in key areas.
“We continue to explore every route to a deal that is in line with our principles,” the Prime Minister’s official spokesman said.
The spokesman stressed that the transition period will end on December 31, rejecting calls for it to be extended due to the coronavirus crisis and the prospect of a no-deal outcome.
It comes as some 18 million people in the South East of England are under new lockdown measures, with a host of European countries limiting travel from the UK.
Countries, including Germany, Italy, the Netherlands, Austria, Belgium and Israel, on Sunday announced that they will ban flights from the UK due to fears over the new variant.
Several nations quickly followed suit. More than 40 countries in total have imposed travel bans on the UK, some for at least 48 hours while leaders come up with a plan for stemming the spread, some until the end of January. France also stopped freight transport via the Channel Tunnel.
Shapps later tweeted: “We’re asking the public and particularly hauliers not to travel to Kent ports or other routes to France. We expect significant disruption in the area.
“My department is urgently working with Highways England and Kent Council on contingency measures to minimise traffic disruption in the area. We will share more details on these shortly.”
The World Health Organisation (WHO) warned its European members to increase measures to prevent the spread of the new COVID-19 variant.
It said that outside Britain, nine cases of the new strain have been reported in Denmark, as well as one case in the Netherlands and another in Australia.
UK prime minister Boris Johnson will chair an emergency response meeting later today to discuss international travel and the flow of freight in and out of Britain.
READ MORE: How UK spending on COVID spiralled
On Saturday, Johnson introduced a fourth tier of coronavirus restrictions in London, the South East and East of England, as well as unveiling tighter plans around households gathering during Christmas.
The new measures will also mean the closure of non-essential shops, gyms and hair salons which had remained open under previous restrictions. However, Downing Street suggested schools could still reopen in Tier 4 areas after the Christmas break.
According to government figures there have been a total of nearly two million confirmed cases of coronavirus in the UK and more than 65,000 people have died.
Lee Hardman, currency analyst at MUFG, said: “The negative developments clearly have increased downside risks for the UK economy and the pound, and will dampen the scope for any gains on the back of a Brexit trade deal before year end.”
He added: “The failure to contain the less contagious COVIS strains does not give us much hope that the new strain will not spread across the world creating similar disruption as in the UK.”
Watch: What happens if no Brexit trade deal is struck?