By Mike Bird and Georgi Kantchev

The pound fell sharply against the dollar and euro Monday after U.K. Prime Minister Theresa May talked of the sort of definitive break from the European Union that many investors believe will hit Britain's trade with its biggest partner.

Sterling fell 1.22% to $1.21 against the greenback, taking the currency to the levels it traded at in October. It was down 1.34% against the euro at EUR1.15. The pound had been trading as high as $1.24 Thursday.

Currency strategists expect a new bout of volatility in sterling as London and Brussels negotiate the terms of Britain's departure and many investors fret about the potential effects of this on the U.K. economy.

Sterling's fall shows that currency traders are mainly ignoring a raft of better-than-expected British economic data to focus on political developments. Strength in the dollar is adding to the downward pressure.

"Uncertainty is extremely high when it comes to the Brexit process" said Thu Lan Nguyen, foreign exchange analyst at Commerzbank. "The risk of a sharp downward move in the pound is always high in this environment."

The heightened uncertainty is unlikely to end in March, when the government says it will trigger Article 50--the formal start of two years of Brexit negotiations.

"Judging from crises that we've seen in Europe in the past couple of years, when a deal is reached, it's reached at the last minute," added Ms. Nguyen. "The big risk for the pound is that it will depreciate sharply before then."

Sterling's latest fall was triggered on Sunday when Mrs. May said in aninterview with Sky News that the U.K. would aim for a clean break from the EU. That reiterated her intention to prioritize control of immigration over access to the bloc's single market in upcoming Brexit negotiations.

"Often people talk in terms as if somehow we are leaving the EU, but we still want to kind of keep bits of membership of the EU," Mrs. May said in an interview with Sky News. "We are leaving. We are coming out."

On Monday, German chancellor Angela Merkel reiterated the line taken by EU leaders since the Brexit vote. Ms. Merkel stressed that full access to the single market would require the U.K. to adhere to the free movement of goods, services, capital and people.

The pound plunged in October following similar comments from Ms. May at the Conservative Party conference. In late September, the pound traded as high as $1.30.

"There is no clarity on what Brexit means; the political statements seem to changeevery day," said Lefteris Farmakis, macro strategist at UBS. "This uncertainty means more volatility in the next few months."

On Monday, Mrs. May said that her comments Sunday were nothing new and that the U.K. wants the best deal, trading with and operating within the single market.

Sterling's continued weakness comes despite U.K. economic data continuing to defy widespread predictions that growth would deteriorate after Britain voted for Brexit in June. U.K. Retail sales grew by 5.9% in the 12 months to November 2016, and a purchasing managers' survey showed manufacturing growing at its fastest pace in 2 1/2 years in December.

But most analysts believe the pound will continue to head lower partly because of worries about the longer-term direction of the U.K. economy.

"The U.K. hasn't left Europe yet," said Phyllis Papadavid, an economist at think tank the Overseas Development Institute.

"Sterling's weakness reflects worries about economic consequences when we have left."

Sterling is also being hit by the strong dollar, which has gained in recent months on a belief that the U.S. Federal Reserve will raise interest rates at a faster rate in 2017. The Wall Street Journal Dollar Index, which tracks the greenback against a basket of other currencies, was 0.01% lower on Monday.

Since the U.S. presidential election in November, the dollar has gained around 3% against the pound, 5% against the euro and 13% against the yen.

Morgan Stanley sees sterling falling to $1.17 this quarter, because it thinks political uncertainty will impact investment in 2017. UBS's Mr. Farmakis expects the pound to fall to $1.13 by the end of the year.

However, some forecasters disagree.

"We think further signs that the government is being forced toward a soft Brexit will emerge, enabling sterling to climb back to about $1.30 and EUR1.24 by the end of thisyear," Samuel Tombs, chief U.K. economist at Pantheon Macroeconomics, said in a research note.

Meanwhile, investors and analysts are scouring the media for hints on how Britain will negotiate its exit and how Brussels will respond.

Mrs. May has revealed few details about her plans and has faced growing pressure from critics who question whether her government has clear goals.

She has promised that she would lay out more details about her Brexit plan early this year, but her office hasn't confirmed a specific date.

The Supreme Court is also expected this month to rule on a government appeal of a High Court decision that found that the prime minister doesn't have the right to trigger negotiations to leave the EU without approval from Parliament.

Jenny Gross and Alistair MacDonald contributed to this article

Write to Mike Bird at and Georgi Kantchev at

(END) Dow Jones Newswires

January 09, 2017 11:52 ET (16:52 GMT)

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