LONDON (Reuters) - The British pound jumped more than half a cent on Thursday to nearly a one-month high after German Chancellor Angela Merkel said a solution to the Irish border issue could be found before the Oct. 31 deadline for Britain to leave the European Union.
Sterling, trading around $1.2160 GBP=D3 earlier, rocketed to as high as $1.2265, before settling around $1.2217, up 0.8% on the day.
Against the euro, sterling rose as high as 90.415 pence EURGBP=D3, a more than 1% rise on the day and its highest since July 29.
The euro zone equity benchmark .STOXXE swung into positive territory and hit the day's high after the comments, while London's exporter-heavy FTSE 100 .FTSE fell as sterling came rose. At 1305 GMT, the euro-zone index was up 0.2% while FTSE was 0.8% lower.
The pound has fallen heavily in recent weeks on fears British Prime Minister Boris Johnson will take Britain out of the EU without a transition deal.
However, with investors having bet heavily against the currency, any sign 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.
“We are not really any closer to finding a solution. [French leader Emmanuel] 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.”
(This story corrects to say pound rose, not fell in fourth paragraph.)
Reporting by Tommy Reggiori Wilkes and Josephine Mason; editing by Sujata Rao