LONDON: Sterling briefly jumped on Tuesday after German chancellor Angela Merkel said the European Union would think about practical solutions to the backstop, an agreed insurance policy for the Irish border that London wants scrapped.

The pound briefly rallied more than 0.7% against the dollar and the euro after Merkel's comments. Sterling rose to as high as $1.2180 from trading below $1.21 earlier, before falling back to $1.2125.

Against the euro, sterling also rallied to as high as 91.015 pence, up 0.4% on the day.

"Merkel's comments seemed to have trigger some model-based buying but I don't see a fundamental shift and the pound's gains are likely to be short lived," said Neil Jones, head of hedge fund currency sales at Mizuho in London.

Prime Minister Boris Johnson's demand that the EU reopen the Brexit divorce deal was rebuffed on Tuesday by the bloc. The deal includes a protocol on the Irish border "backstop" - which Johnson wants scrapped - that then-prime minister Theresa May agreed in November.