The BBC first reported that Downing Street has now concluded that a Brexit deal is “essentially impossible” after Merkel told Johnson in a phone call on Tuesday that a deal based on the UK’s latest Brexit proposals was unlikely.

The pound fell by more than 0.4% against the dollar (GBPUSD=X) to around £1.225. It declined by as much as 0.68% against the euro (GBPEUR=X), to €1.11, a four-week low.

According to a Downing Street source, Merkel said that the UK must accept that Northern Ireland must remain part of the European Union’s customs union if it wants to reach agreement on a deal with the bloc.

The pound fell to a four-week low against the euro on Tuesday.

The German government confirmed that the call, which was held at 8am on Tuesday, took place. But it declined to comment further.

“As usual, we do not report from such confidential conversations,” a spokesperson said.

The Downing Street source described it as a “clarifying moment” for Johnson.

A spokesperson for the European Commission said on Tuesday that the EU’s position “has not changed.”

“We want a deal, we are working for a deal with the United Kingdom, and under no circumstances will we accept that the EU wants to do harm to the [Good Friday Agreement]. The focus of our work is to protect it in all its dimensions.”

A proposal put forward by Johnson last week would see the controversial backstop, which is designed to prevent a hard border in Northern Ireland, replaced with a system that would include “decentralised” economic controls.

Though Northern Ireland would leave the EU’s customs union, an “all-island regulatory zone” could be implemented on a rolling basis every four years.

The plans have been rejected by the business community in Northern Ireland and the majority of political parties there, and the EU believes that the plan could cause major disruption to Ireland’s all-island economy and harm the Good Friday agreement.

The 1998 agreement ushered in 20 years of relative peace and stability on the island of Ireland.

In the 30 years before it was signed, clashes between unionists and republicans — known simply as the Troubles — took the lives of more than 3,600 people.

“Sterling is under the cosh again as hopes of a deal between the UK and EU fade. The last flicker of hope was snuffed out this morning after a call between the prime minister and chancellor Merkel of Germany left the process at an impasse,” said Neil Wilson, the chief market analyst at Markets.com, in a note.