Sterling slid against the euro on Wednesday, dropping to a one-week low as concerns Britain is headed for a disorderly exit from the European Union combined with improved economic sentiment in the euro zone. Diminishing political worries in Italy and strong trade data helped the euro on Wednesday. The EU reached a deal over Italy's contentious 2019 budget, halting EU disciplinary steps against Rome over excessive borrowing and signalling an end to weeks of wrangling that had shaken bond markets.
Trade data showed European exports rose by more than 11 percent in October compared to a year before, alleviating some jitters that trade tensions were hurting global commerce. "The general news out of Europe this week, whether it is politics or economic data, has been pretty good and that is helping the euro against the pound," said Ulrich Leuchtmann, a strategist at Commerzbank in Frankfurt.
The single currency rallied as much as half a percent to 90.38 pence against a struggling pound before settling at 90.24 pence. The pound fell against the dollar before later trading up 0.2 percent at $1.2664. Broadly tepid inflation data in the United Kingdom and traders shifting their dollar positions before a Federal Reserve monetary policy meeting led to volatile trading in sterling on Wednesday.
Consumer prices in Britain rose at an annual rate of 2.3 percent, the slowest since March 2017 and down from 2.4 percent in October, after the biggest monthly fall in petrol prices since 2015.
The slowdown was in line with the median forecast in a Reuters poll of economists.
However, markets are wary of placing too much of an emphasis on economic data, with the Bank of England repeatedly saying that the outcome of Brexit negotiations will be a key factor for the path of future interest rates.
Prime Minister Theresa May has yet to win the support of a deeply divided parliament for the deal she struck last month with EU leaders to maintain close ties with the bloc, with less than three months to go until Britain exits the EU.
"The government is playing a very hardball game, however, as it delays the Brexit vote until the New Year, which is curtailing the debate over May's plan and effectively giving little time for alternatives to be found," Scotiabank strategists said in a note.
May said on Wednesday she would set out in the New Year what assurances she had won from the EU over her Brexit deal. Parliament is due to vote on her agreement with Brussels in mid-January.