NEW YORK (Reuters) - The pound rallied on Wednesday, rebounding from a 20-month low, as traders bet British Prime Minister Theresa May would survive a no-confidence vote on her leadership, allowing her to salvage her deal for Britain to exit the European Union.
A revised Italian budget proposal to the European Union that is lighter on debt lifted the euro against the dollar.
An index that tracks the dollar against a basket of currencies including the euro and sterling retreated below a near one-month peak reached on Tuesday.
"It looks like she is going to win and we have to see how many votes she wins by," said Stan Shipley, a strategist at Evercore ISI in New York.
A secret ballot on the no-confidence vote on May started at 1800 GMT and was expected to end at 2000 GMT in a room at the House of Commons. An announcement was due at 2100 GMT.
Almost 200 members of May's Conservative indicated support for her as voting began, according to a Reuters tally.
Even if May fends off the challenge from within her own party, analysts said they were not sure she had enough support for her Brexit deal with Brussels.
"Once she wins, it will put a lot of people in a predicament either you accept her Brexit deal or a hard Brexit," Shipley said.
At 3:00 p.m. EST (2000 GMT), sterling <GBP=D3> was 1.23 percent higher at $1.2638, bouncing from a 20-month low of $1.2477 set earlier in the session. Against sterling, the euro <EURGBP=D3> was down 0.71 percent at 90 pence, but against the dollar, the single currency <EUR=EBS> gained 0.42 percent at $1.1365.
Italy proposed a budget deficit target of 2 percent, below the previous target of 2.4 percent which Brussels rejected earlier.
The dollar index <.DXY> was down 0.34 percent at 97.06.
The greenback's losses were limited by higher U.S. bond yields and in-line data on domestic consumer prices in November which showed the underlying inflation trend remained firm.
The latest CPI report supported the view the Federal Reserve would raise short-term interest rates by a quarter point to 2.25-2.50 percent at its upcoming two-day policy meeting.
The futures market implied traders saw a 77 percent chance the U.S. central bank would increase rates for a fourth time in 2019 next week, slightly higher than 76 percent late on Tuesday, according to CME Group's FedWatch program.
Currency bid prices at 2:58PM (1958 GMT).
(Additional reporting by Saikat Chatterjee in LONDON; Editing by Phil Berlowitz and David Gregorio)
