The pound fell today and derivatives markets signalled more weakness for the currency as fears grow of a catastrophic "no-deal" Brexit should politicians hold firm in their rejection of Prime Minister Theresa May's divorce deal with the EU. 

May has asked European Council President Donald Tusk to delay Brexit from March 29 until the end of June.

She said she was preparing for a third vote in the British parliament on the exit deal she arduously negotiated with the European Union. 

German Chancellor Angela Merkel has voiced readiness to back a short extension.

But traders are increasingly worried that in the likelihood of her deal failing for a third time to pass parliament, a host of possibilities open up, none of which are positive for the currency in the short term.  

While banks' probability metrics of a no-deal Brexit remain low and have not changed in recent days, increased signs of unease are showing up in currency derivative markets. 

Risk reversals in the pound maturing in two weeks fell to their lowest levels since mid-December.

This is a gauge of demand for the currency through calls to puts, with puts offering the right to sell at a certain price and calls the right to buy. 

Risk reversals maturing over one to three months registered bigger declines, falling to their lowest levels since November, even as broader spot markets stabilised around $1.3160.

Analysts said that sterling continues to be volatile, pushed and pulled around as the news unfolds. 

In a sign of how much focus there is on Brexit headlines, an unexpected rise in retail sales data in February failed to elicit any meaningful reaction from the pound. 

The British currency edged 0.2% lower to $1.3168 today. Against the euro, it weakened 0.1% to 86.59 pence. 

Another source of support for sterling – expectations of an interest rate rise by the Bank of England – is also ebbing. 

The bank had been expected to raise rates once Britain exited the EU with a deal and transition period in place, but could be forced to ease policy instead in the event of a no-deal outcome. 

The Bank of England meets today and its post-meeting statement will not yield any policy changes. 

But it could provide clues on how it could act if a Brexit extension is not granted.