"A short squeeze happens when speculators who have sold the pound in expectation of further declines are forced to re-buy the currency to close their bets and stem losses. This situation can develop with little warning when large numbers of traders are caught "offside" when a market turns unexpectedly." - Last update

The short squeeze continued into the end of October, and the new month has seen us trade in a corrective range between 1.75 - 1.80.

Last week's Bank of England meeting was widely expected to result in a further increase to QE, but traders were relieved that the bank extended the bond purchasing programme by just £25bn, and not the £50bn that some expected. Sterling duly rallied, breaking new high ground against the Euro and US dollar this week, but found it harder going against the commodity currencies which are still enjoying the tailwind of record gold prices, and oil bumping along close to 12 month highs. The Canadian dollar is benefitting from a continued flow out of its US counterpart. While yields between the two are flat, the exodus from USD is helping gold, which in turn is supporting CAD. The US currency plunged on Monday following comments from the G20 over the weekend, indicating that interest rates would need to remain low for some time yet. A weak US dollar dents Canadian exports, leading Bank of Canada governor Mark Carney to vocalise his desire for currency stability. Intervention by BoC is almost certainly not an option however, as the US dollar down trend is broad based. Competitive devaluation will continue to be governed by monetary and fiscal stimuli rather than direct participation in the markets.

The technical outlook remains positive as long as we continue to trade close to recent highs. While there can be no guarantee that sterling is out of the woods yet, the extreme levels of pessimism reached last month could signal a major low. That pessimism was characterised by a sense of general resignation that the pound was heading for parity against the euro! That is still possible, but in the short term we would like the pound to defend 1.7500 and certainly 1.7110 in order to maintain the initiative.