NEW YORK (Reuters) - The pound rallied on Wednesday, rebounding from a 20-month low, as British Prime Minister Theresa May survived a no-confidence vote on her leadership that will allow her to press ahead with an attempt to salvage her deal for Britain to exit the European Union.

FILE PHOTO: British five pound banknotes are seen in this picture illustration taken November 14, 2017. REUTERS/ Benoit Tessier/Illustration/File Photo

The euro rose against the dollar, meanwhile, following a revised Italian budget proposal to the EU that is lighter on debt.

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.

In a secret ballot, May won support among two-thirds of her Conservative colleagues. It remained unclear, however, whether she could push her Brexit proposal across the finishing line, which could renew selling pressure on the sterling, analysts said.

On Monday, she deferred a Commons vote on the proposed deal due to a lack of support and must now try to gain assurances from EU leaders that will win over reluctant lawmakers.

“Consequently, the prime minister and the pound don’t appear to be out of the woods,” said Joe Manimbo, senior market analyst at Western Union Business Solution in Washington.

Sterling GBP=D3 rose 1.14 percent to $1.2627, bouncing from a 20-month low of $1.2477 set earlier in the session. Against sterling, the euro EURGBP=D3 fell 0.6 percent to 99.05 pence, but against the dollar, the single currency EUR=EBS gained 0.45 percent at $1.1369.

Earlier on Wednesday, Italy proposed a budget deficit target of 2 percent, below the previous target of 2.4 percent that Brussels had rejected.

The dollar index .DXY was down 0.34 percent at 97.054 amid fears of a federal government shutdown by year-end.

On Tuesday, U.S. President Donald Trump had threatened not to sign an agreement to fund the government if lawmakers did not agree to fund his proposed border wall.

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 78 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.