The technical outlook is mixed. We are cautiously optimistic for sterling's prospects as long as we can hold above that 140.00 level. A close below there would signal a likely deterioration.

As we noted in our last report, the sterling/yen chart resembles the sterling/US dollar chart because of similar relative weakness of the dollar and Yen this year. The rebound from 140.00 in October gives us reason for optimism here, and the fact that sterling has in a holding pattern for the last few weeks gives added confidence that the next big move should be up. We would revise this assessment if the interbank rate drops below 145.82. In the meantime a break above 153.24 would give sterling another boost, opening the way to the 2009 highs around 163.00.

Long Term:

Last year's financial market turmoil saw two currencies benefit. The US dollar and the Yen. The dollar because it has always been regarded as a "safe haven" in difficult times, and the Yen because so many traders had borrowed the currency at low interest rates and sold it to buy higher yielding stuff like the Aussie dollar. As soon as the crisis emerged and the high yielders started to fall (sharply!) those traders dumped the risky high yielding stuff and piled back into the Yen in order to repay their loans. That was the so called "carry trade" unwinding. While the Yen and US dollar are distinctly different animals, it's interesting to note how similar the Sterling/Yen and Sterling/Dollar charts look. That's because both of those currencies have seen outflows since the stock markets hit rock bottom back in March. Investors are once again taking on risk, and that has been reflected through diminished demand for JPY and USD. Since June - August both dollar and Yen have been creeping higher against an extremely weak pound. We tested the 140.00 level in the last few weeks, and saw a strong reaction in the last few days.

Short Term:

Sterling enjoyed a strong rally into the end of last week after bullish comments from Bank of England policy maker Paul Fisher noting that quantitative easing is working well. The scene was already set for some sort of rebound after better than expected UK jobless figures, but the Fisher comments sparked a full blown "short squeeze" on Thursday morning. 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.

There is still some debate over whether the Bank of England may extend so called "QE" at the November meeting, but traders will be focussing on Wednesday's release of the October meeting minutes to get a real view of how that debate is looking inside the nine member Monetary Policy Committee.

The technical outlook looks better after last week's movement. 140.00 has been established as strong support, so we would become more concerned if the pound breaks below there.

Sterling plunged this morning, spooked by a series of negative news reports and comments from Bank of England governor Mervyn King saying that sterling weakness was "helpful" in rebalancing the UK economy. We have been hinting at the BoE's implicit approval of sterling's slide for the last few weeks, and now they have come right out and said it! The comments are extremely unhelpful for the pound, which was just starting to gain a little traction yesterday following the release of the most recent BoE meeting minutes which showed that all nine members voted to keep the central bank's assets purchase programme (otherwise known as quantitative easing) on hold at £175bn. King's comments have overshadowed the relief rally that we saw yesterday, and the Yen continues to strengthen against most other currencies, and so far the traditionally interventionist Ministry of Finance has remained on the sidelines. During period of excessive Yen strength the MoF has intervened to drive the currency lower (and thus protect the country's exports from becoming too expensive to foreign buyers), but recent comments suggest that the Japanese view the Yen as nearing a peak against the US dollar. That doesn't mean the Sterling/Yen rate can't go lower though, and by all readings the charts look negative. Sterling is now testing the key support just below 1.47, and below there we see 1.43 and 1.39 as the next likely levels. Given the latest bout of sterling weakness, and the lack of any drivers to reverse the situation, clients with Yen requirements should strongly consider covering any exposure.

Sterling jumped against most currencies today after the Bank of England left interest rates unchanged at 0.5% and made no further increases to the quantitative easing programme. However, the gains have been more muted against a generally strong Yen which breached a key level against the dollar on Thursday, drawing further technical support. Both the dollar and the Yen were under pressure in the first half of the year as investors deserted these safe havens in favour of higher yielding, riskier assets. Since early August when the strong stock market rally began to stall both currencies strengthened against sterling and the euro, with the Yen benefitting most, outperforming the US dollar by 6% in the last month.

The pound has been on the back foot since last month's central bank meeting at which they raised QE from £125bn to £175bn. The minutes of that meeting showed that three of the nine strong committee actually voted for a larger increase, putting the markets on notice that further increases were likely. More QE means more money in the system, effectively devaluing the pound against its peers. Traders reacted with relief, bidding the pound higher in the short time since the noon announcement. We will have to wait a few days for publication of the minutes of today's meeting to show how last month's 6-3 skew may have changed.

The technical outlook is improving slightly. The Sterling/Yen rate is still in an uptrend as long as we continue to trade above the July low around 146.90. We have also established support around 150.00 over the last few days and appear to be making some progress from there. The next key resistance is seen around 156.85 - 157.50, with a break above there opening the way to the 163.00 highs.

Given sterling's reaction to the BoE update today, we are hopeful that the pound may be in the early stages of a new rally. Much also depends on the sustainability or otherwise of the global stock market rally. A correction in stocks would boost the Yen. Clients with Yen requirements have reason for cautious optimism, but we would recommend considering a stop order below 146.90 in case of renewed weakness in the rate.