The European Union reached a deal over Rome'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 this week showed European exports rose by more than 11 percent in October compared to a year-ago period, 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 more than a third of a percent to 90.18 pence against struggling sterling, reaching its highest level in a week.
Against the dollar, the pound was broadly flat at $1.2637, giving up most of its earlier modest gains on broadly tepid inflation data.
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 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 it in mid-January. (Reporting by Saikat Chatterjee Editing by Mark Heinrich)
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