The pound drifted lower against its major counterparts in the European session on Wednesday, as European shares fell ahead of Fed policy decision as well as on Brexit uncertainty after the European Commission President Jean-Claude Juncker remarked that a decision on Theresa May's Brexit extension request will not be taken this week.
The Fed announces its interest rate decision later today, with markets looking for any change in tone in the policy statement.
Chairman Jerome Powell's press conference is in focus for clues about the likely path of U.S. borrowing costs. In his previous meeting, Powell signaled a pause to the tightening cycle on signs of slowing economic growth in the U.S.
With the UK's Brexit deadline looming and no deal yet in place with the EU, investors cautiously awaited Brussels summit on Thursday.
British Prime Minister Theresa May is expected to write to EU President Donald Tusk with a plan for delaying Brexit beyond March 29.
The EU's chief negotiator, Michel Barnier, has said that EU member states should prepare for a no-deal Brexit.
He cautioned that EU leaders require a concrete plan from the UK in order to be able to make an informed decision.
Data from the Office for National Statistics showed that UK consumer price inflation unexpectedly accelerated in February for the first time in six months.
The consumer price index rose 1.9 percent year-on-year following a 1.8 percent increase in January. Economists had expected the inflation rate to remain unchanged.
Core inflation slowed to 1.80 percent from 1.90 percent. Economists had expected the rate to remain unchanged.
Input price inflation accelerated to 3.7 percent from 2.6 percent in January. Economists had projected inflation of 4.10 percent.
Output price inflation edged up to 2.2 percent in February from 2.1 percent in January. That was in line with economists' expectations.
The ONS also reported that UK house price inflation slowed to 1.7 percent in January, thus marking the weakest level since June 2013.
The currency held steady against its major counterparts in the Asian session, with the exception of the yen.
The pound depreciated to a 2-day low of 147.43 against the yen, from a high of 148.09 hit at 9:15 pm ET. On the downside, 145.00 is likely seen as the next support for the pound.
Minutes from the January 23 monetary policy meeting showed that members of the Bank of Japan's Monetary Policy Board said that the country's economy continues to expand at a moderate pace.
Annual inflation is expected to continue to increase gradually towards 2 percent, the bank said - and the BoJ is likely to keep interest rates low for an extended period of time to help facilitate that.
Having climbed to 1.3260 against the franc at 5:30 pm ET, the pound reversed direction, trading at a 1-week low of 1.3204. The pound is seen finding support around the 1.31 level.
The pound was down 0.5 percent at a 2-day low of 0.8589 against the euro, following a high of 0.8550 touched at 5:15 pm ET. Next key support for the pound is possibly seen around the 0.88 level.
Preliminary figures from the Federal Statistical Office showed that Germany's producer price inflation was unchanged in February, defying expectations for an acceleration, after slowing in the previous two months.
The producer price index rose 2.6 percent year-on-year, same as in January. Economists had expected a higher rate of 2.9 percent.
The U.K. currency declined to a 2-day low of 1.3212 against the greenback, reversing from a high of 1.3273 seen at 6:45 pm ET. Further downtrend is likely to take the pound to a support around the 1.30 level.
Looking ahead, the Federal Reserve announces its interest rate decision at 2:00 pm ET. Economists widely expect the central bank to keep benchmark rate in a range of 2.25 percent to 2.5 percent.
