The pound fell below $1.21 for the first time since January 2017 as concerns mounted that the UK is heading for a no-deal Brexit.

Sterling fell to $1.2085 before edging up to $1.2104, down 0.45% against a stronger US dollar. Against the euro the pound fell 0.01% to €1.0978.

The dollar rose on currency markets after the US central bank, the Federal Reserve, cut interest rates on Wednesday but indicated there were fewer cuts to come than expected.

The pound has also been under severe pressure because Boris Johnson has pledged that the UK will leave the EU on 31 October with or without a deal.

The prime minister has said he will not negotiate with the EU unless it drops backstop arrangements to prevent a hard border in Ireland. He has also announced £2.1bn of extra spending to prepare for a no-deal Brexit.

“Sterling remains vulnerable to a further escalation in Brexit tensions and we anticipate the market will likely discount higher risks of a no-deal outcome in the weeks ahead,” Roger Hallam, the currency chief investment officer at JP Morgan Asset Management, told Reuters.

The pound was also affected by a bleak manufacturing survey that showed factory managers cutting production at the fastest pace since 2012.

Sterling’s fall will be felt immediately by holidaymakers abroad. At airports, travellers have been getting less than a euro and little more than a dollar for each £1. In the longer run, a weak pound will increase the price of imports, from foodstuffs to electronic gadgets, pushing up inflation and it indicates a lack of confidence about the UK’s prospects in international markets.