23.08.201909:20 Forex Analysis & Reviews: Merkel triggers sterling spike, cautious buying on dips

The pound sterling spiked higher on Thursday following reported comments from German Chancellor Merkel that a practical solution to the Irish backstop issue could be found before October 31^st.

GBP/USD climbed to 3-week highs above 1.2250 with EUR/GBP lows near 0.9030 amid a sharp round of short covering.

The meeting between Prime Minister Johnson and French President Macron was more cordial than had been expected, although Macron reiterated the need to protect the EU single market.

Markets are still very sceptical that any solution to the Irish backstop can be found with efforts likely to focus on technology-based solutions to maintain an open Irish border. At the same time, sufficient monitoring of cross-border goods can be achieved.

The latest weekly CFTC data reported that short, non-commercial sterling positions were still close to 3-year highs, maintaining the potential for sharp bouts of short covering if there is a shift in sentiment.

The sterling's volatility will inevitably remain higher in the short term, especially as there will be further discussions between UK and EU leaders at the weekend G7 Summit. Overall volatility is also likely to increase after a key speech from Fed Chair Powell. Besides, trade and currency issues will be important items on the agenda at the G7 meeting.

Domestic political tensions will intensify next week with opposition party leaders expected to meet on Tuesday 27^th to discuss ways to block any government move to sanction a 'no-deal' outcome.

Political manoeuvring and speculation will also intensify ahead of the House of Commons return from recess the following week with the possibility that the government will face an early no-confidence vote.

Technically, it will be crucial for GBP/USD to hold above the 1.2175/80 area which previously acted as tough resistance. Failure to hold above this area would trigger a fresh dip in sentiment.