Sterling fell against the euro on Wednesday after British Prime Minister Theresa May suffered an early setback to her Brexit plans ahead of a key vote in parliament next week.
With less than three months before Britain is due to leave the EU, parliament began a five-day battle over May’s Brexit plan, demanding the government come up with a plan-B within days if she loses a vote on her deal to leave the European Union.
Parliament is due to vote on the agreement on Jan. 15, and May looks set to lose the vote unless she can convince opponents within and outside her party to back her deal. The run-up to the vote is likely to dominate trading of sterling.
Sterling’s relative strength in recent days is mostly down to dollar weakness - the pound’s performance against the euro has been more muted.
The dollar sank on Wednesday to its lowest since October, with gains led by the euro and sterling, as risk appetite improved on optimism over U.S.-China trade negotiations, prompting investors to reduce their safe-haven bets.
News that China and the United States had extended trade talks in Beijing for an unscheduled third day boosted oil prices and broader sentiment. Expectations of tensions easing in China helped the mood as well, with Asian and European shares rallying.
The Greenback was also weakened versus major peers due to growing expectations that the Federal Reserve will pause its rate tightening cycle this year.
Minutes from the Fed’s Dec. 18-19 meeting revealed that several policymakers were in favor of the US central bank keeping rates steady this year.
Nevertheless, most traders still expect market sentiment to remain positive in the medium term on expectations the Fed will not raise rates in 2019 as well as a potential trade deal in coming months between the world’s two largest economies.
Europe’s single currency briefly gave up gains after disappointing trade data out of Germany and a fall in consumer confidence in France. After initially slipping following poor German and French economic data, the euro recovered to post its highest in about three months.
A day earlier, regional data showed German industrial output fell for the third straight month, feeding investor concern about a slowdown.
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