By Anneken Tappe, MarketWatch

Foreign exchange markets reflected an improvement in risk sentiment after sluggish data on Chinese economic growth was offset by words of support Chinese authorities on Friday. Elsewhere, Italy's budget and Brexit remained major drivers as uncertainty seems here to stay.

Late Thursday, China released its third quarter GDP growth numbers--a highly anticipated data point for investors everywhere as the health of China's economy has global growth implications. Beijing reported 6.5% growth year-over-year between July and September, down from 6.7% in the prior quarter and undercutting expectations of 6.6%. It is the country's worst growth read since 2009 (http://www.marketwatch.com/story/chinas-growth-slows-to-weakest-pace-since-financial-crisis-2018-10-18).

The People's Bank of China, its securities regulator and banking and insurance regulator issued statements Friday in support of the stock market and positive economic fundamentals, soothing investor concerns and leading Asian equities higher. China's Shanghai Composite Index ended Friday 2.6% higher after dropping almost 3% on the previous trading day.

Don't miss:Here's why investors are anxious about China's next move (http://www.marketwatch.com/story/heres-why-investors-are-anxious-about-chinas-next-move-2018-10-18)

The Chinese yuan, which had touched levels not seen since January 2017 earlier this week, strengthened against a subdued U.S. dollar in Friday trading. One buck bought 6.9303 yuan in Beijing, and 6.9292 yuan in the offshore market.

The popular ICE U.S. Dollar Index was meanwhile little changed in negative territory at 95.866. The gauge is on track for a 0.7% gain for the week, reversing the previous week's losses.

Elsewhere, the euro is in focus, remaining on track for a 0.9% drop this week amid worries about Italy's economic health.

"As if Brexit isn't enough of a headache, the EU has another fight on its hands as the populist coalition government in Italy attempts to circumvent the block's budget rules in order to follow through on campaign promises that are, unsurprisingly, much easier to make than deliver on," wrote Craig Erlam, senior market analyst at Oanda, in a note Friday.

The proposal foresees a ballooning budget deficit, which would be out of line with the European Union's rules. Yields on Italian government debt rallied in response over the past days, with the 10-year yield reaching a fresh 2014 high of 3.777%.

Still, the euro was slightly upbeat early Friday, buying $1.1471, up from $1.1453 late Thursday.

The full draft budget law will be submitted to the Italian parliament by Saturday, where it will need to get approved by the end of the year.

On the Brexit front, U.K. Prime Minister Theresa May said London would be willing to extend its transition period by a year, which was met with criticism at home. An additional year of talks would mean more uncertainty for the battered British pound for longer. In the year so far, sterling has dropped 3.5%.

One pound last bought $1.3032, up slight from $1.3018 late Thursday.

According to a report by the Times of London (https://www.thetimes.co.uk/article/revolt-grows-over-may-s-handling-of-brexit-talks-7qs6mwsch), former Brexit Secretary David Davis is angling to serve as interim leader in a potential leadership challenge to May amid anger some Conservative members of parliament over the prospect of an extension.

Elsewhere, the New Zealand dollar was leading top gainers among developed market currencies, buying $0.6597, up from $0.6544 late Thursday in New York, despite a lack of significant headlines.

"On the contrary, there was New Zealand-negative news in that immigration continued to fall in September to nearly a four-year low," said Marshall Gittler, chief strategist of ACLS Global. "That hit the New Zealand dollar but only temporarily. It looks like investors are just continuing to cut their short positions."

(END) Dow Jones Newswires

October 19, 2018 08:33 ET (12:33 GMT)