As long as you add the line# -*- coding: utf-8 -*-
at the top of the file, you can use Unicode characters inside Unicode string literals. Without the encoding line Python throws a SyntaxError, because UTF-8 multibyte characters are not ASCII.
If you're working in the interactive console, things are a little different. Input characters are always encoded as UTF-8, even inside Unicode literals. For example, the literal u"ä" incorrectly becomes u"\xc3\xa4". The correct value would be u"\xe4". This means that to use Unicode characters in the console, you need to either use escapes or manually decode the UTF-8 bytes: "ä".decode() correctly becomes u"\xe4".