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Europe, Forex

Sterling jumps as traders cling to Merkel’s Brexit backstop comments

* Sterling rises above $1.22, investors question rise

* Merkel backtracks on comments she made on Wednesday

* Graphic: World FX rates in 2019

* Graphic: Trade-weighted sterling since Brexit vote (Adds context and chart, updates prices)

By Tommy Wilkes and Olga Cotaga

LONDON, Aug 22 (Reuters) – The pound was on course for its best day in months on Thursday after traders interpreted comments from German Chancellor Angela Merkel to mean that a solution to the Irish border problem could be found before Britain leaves the European Union on Oct. 31.

Traders have been betting heavily against the currency this summer and so any glimmer of a breakthrough in Britain’s efforts to convince the EU to renegotiate the deal is likely to send the pound jumping, analysts and traders say.

Merkel on Thursday backtracked on earlier comments that appeared to set Britain a 30-day deadline to find a solution to the so-called Irish backstop. Instead she said that the UK could have time until the Brexit deadline of Oct. 31 to find a compromise.

Deciding how to prevent a hard border dividing Northern Ireland from the Republic of Ireland after Brexit is at the heart of Britain and the EU’s inability to come up with a mutually acceptable withdrawal deal.

British Prime Minister Boris Johnson wants the backstop – an insurance policy included in Britain’s Withdrawal Agreement with the EU to avoid the return of a hard border on the island of Ireland – scrapped. The EU says the current plan, which was approved by Johnson’s predecessor Theresa May, is not up for renegotiation.

Sterling jumped to a three-week high of $1.2265 after Merkel’s comments before settling around $1.2251, up 1.1% on the day.

Against the euro, sterling rose as high as 90.29 pence , also a three-week high, and was last up 1.1% at 90.49 pence.

The euro zone equity benchmark swung into positive territory and hit the day’s high after the comments, though it gave back some of the gains afterwards. London’s exporter-heavy FTSE 100 fell as stronger sterling puts exporting companies under pressure.

Some investors, however, remain doubtful about Johnson’s ability to convince European leaders to reopen Brexit negotiations and find a deal by October. Johnson has said Britain will leave the EU on Oct. 31 with or without a deal.

A solution to the Irish backstop can be found “but no one has managed to do that in the past 2.5 years,” said Marc Ostwald, global strategist and chief economist at ADM Investor Services.

Moreover, “she (Merkel) has said nothing new,” Oswald said.

Sterling was already trading higher on Thursday despite the fact that French President Emmanuel Macron told Johnson that it was for him to choose Britain’s destiny after Brexit.

“We are not really any closer to finding a solution. Macron has met Johnson with scepticism. The markets are biased towards the optimistic view because everyone still thinks that given the negative consequences of no-deal Brexit for both sides a solution will be found,” said Esther Maria Reichelt, an FX strategist at Commerzbank.

“It’s a classic prisoners’ dilemma.”

(Reporting by Tommy Wilkes and Olga Cotaga; Editing by Kirsten Donovan)

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