We enter the new year with the same problems that persisted through the second half of 2009. Namely, sterling's credibility is being stretched by the ballooning budget deficit and fears of a hung parliament at the general election. For the dollar's part, the currency weakened through much of 2009 as investor risk appetite increased leading to funds being moved out of the safe haven of the greenback and into higher yielding currencies like the Aussie dollar. That trend has allowed sterling to hold its ground against USD over the last few months, leaving everything to play for in 2010. If the nine month old stock market rally falters, we would expect the dollar to benefit, but as long as stocks keep going up, sterling has a good chance of holding its own or even making further gains.

The Bank of England meet tomorrow and are widely expected to keep interest rates on hold at 0.5%, with no change to the quantitative easing package.

The technical outlook is still positive for sterling, because the last few months have been spent in a consolidation pattern after the strong gains in the second quarter of 2009. That means the trend is still positive, at least while we continue to trade above 1.5707, the October low.

The fundamental picture has improved marginally after inflation surged to a six month high of 1.9% in November, up from 1.5% the previous month. Also aiding the pound are reports that Abu Dhabi will provide $10bn to ease Dubai World's debt problems. The UK banking sector holds significant exposure to these debts, but bank share prices hardly reacted to the positive news.

The dollar seemed to make a major turn on the surprisingly strong jobs data a couple of Friday's ago. Until then, positive US economic data was generally benefitting high yielding currencies as investors took the news as yet more evidence of a world recovery and reallocated assets to riskier currency units accordingly. Perversely the dollar would actually fall on such news as money flowed out of the currency towards other assets. The market's reaction to the jobs data was different this time, and the dollar directly benefitted. That may signal a new period of USD strength, and judging by the Euro/Dollar rate (which has dropped sharply and is now testing three month lows) we could see further falls in the sterling/dollar rate in the short term. We therefore urge clients to remain cautious and cover at least half of any dollar requirement now to avoid the risk of further deterioration.

In last week's update we remained positive on the sterling/dollar rate on the basis that the 1.6250 level had been left intact after the initial reaction to the Dubai scare, which means our sixth month technical outlook is still looking bullish. Sterling has continued to build on that reaction, putting in a solid week despite a weaker than expected services sector report yesterday. That gives us some comfort in the short term, and we would now like to see a continued rally above the November high (1.6880) to open the way to the 1.7043 high and beyond.

The impact on the currency markets has also been fairly predictable. Just like last year's turmoil, this shock has sent traders scurrying for the apparent safe haven of the US dollar and the Yen. Sterling slipped 4 cents since yesterday but we have seen some rebound this afternoon as stock markets stabilised. Oil and gold also fell, partly as a reaction to the stronger dollar, but also because traders are taking their profits off the table in a general move towards de-risking portfolios.

The technical outlook for sterling is still relatively sturdy on a six month view as long as we don't start breaking levels like 1.6250 and the key support at 1.5707. We mentioned the former level in our last update, and it's perhaps encouraging that this afternoon's strong bounce came just 20 ticks ahead of that support. The short term outlook will be dominated by risk sentiment, with further stock market wobbles likely to result in further USD strength; whereas a return to "normality" after the weekend would see sterling recover.

As we've said before in these updates, "what should go down and doesn't go down can only go up". That's just a common market proverb and we shouldn't be unduly optimistic just because it sounds good; but like all proverbs, it does carry some truth, and we would not be surprised to see sterling continue to rally towards the 1.7043 level that marked the 2009 high in due course. The short and medium term trend is up, and the first important support level is 1.6250, where we spent some time consolidating in late October/early November. A break below that level would be cause for concern, but in the meantime we are giving the pound the benefit of the doubt.

The technical outlook remains positive. After staging an impressive rally off the 1.5700 lows we have spent the last two weeks consolidating, and should be well placed to continue that rally soon. A close above 1.6700 would strengthen the outlook considerably, opening the way for an attack on the recent highs above 1.7000. On the downside, a break below 1.6250 would be cause for concern.

The pound has enjoyed a strong rebound over the last week, sparked by comments from BoE member Paul Fisher, pushing the prospect of further quantitative easing ("QE") on to the back burner. The heat was further reduced after the minutes from the October BoE meeting were released on Wednesday, showing that all nine members of the committee voted to keep QE on hold. That gave the pound another boost. BoE members were hung up on the idea that increasing QE could help to stoke higher inflation in 2010. The latest developments inside the Bank of England have shifted the balance of the debate towards the possibility that the UK is now winding down the liquidity splurge as economic conditions gradually improve. UK Retail sales data for September were slightly lower than expected, but showed a 2.4% year on year increase, enough to keep sterling's rally on the rails.

The technical outlook has improved considerably. In last week's update we wanted the pound to hold 1.62 into the end of the week. It managed that easily, and has since added another four cents. That puts us within range of the 2009 highs. Firstly we have 1.6741 to capture. That was a an important high in late June and early September, and as such may pose resistance. If we can get above there the next target will be 1.7043, the high of the year.

Sterling is enjoying its largest one day gain against the Dollar in six months 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 yesterday. The dollar had been creeping higher over the last week as Fed' chairman Ben Bernanke made noises about higher interest rates, even though those noises were basically saying that higher rates are a long way off. Nevertheless, markets took this as an excuse to buy the dollar.

The Fisher comments sparked some further interest in the pound today, and the rally gained traction as a full blown "short squeeze" developed over the course of 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. That is what we are seeing today.

There is still some debate over whether the BoE may extend so called "QE" at the November meeting, but traders will be focussing on next week's release of the October meeting minutes to get a real view of how that debate is looking inside the BoE.

The technical outlook is much improved as long as we can sustain today's gains into the weekend. In last week's update we said that sterling needed to capture 1.6126 to effectively reverse the slide. That box was ticked this morning, so we could be heading back towards the high 1.60s in due course. That's as long as we don't slide back below 1.5800 again.

The pound continued its descent last week, trading as low as 1.5770, but clinging on to end the week almost unchanged. The dominant theme remains one of general US dollar weakness due to high investor risk appetite, offset by investors' lack of appetite for sterling, leaving the GBP/USD rate to drift lower. Sentiment towards the pound improved marginally as traders started to look forward to this month's Bank of England meeting on Thursday, with the all important quantitative easing package expected to remain on hold at £175bn; but that sentiment is overshadowed by the expectation that there may be an extension in November, leaving a cloud hanging over the market in the meantime. That may make it difficult for sterling to stage any sustainable rally in the short term.

We're moving our technical outlook from negative to neutral. We need to recapture 1.6125 to signal a short term trend change. That level worked as support in Aug'/Sep', and has been working as resistance since we broke below it. Support levels, once broken, usually turn into resistance and vice versa. On the downside we seem to have found support around the June low, but a daily close below there (1.5770) would signal a continuation of the short term downtrend.

Sterling has continued its slide since last week's update. Mervyn King's comments expounding the benefits of a weak pound continue to weigh on the market, giving traders little comfort in holding the pound. In other news, commentators are speculating that the Bank of England could introduce negative interest rates on bank deposits held at the central bank. By penalising the banks for holding large cash reserves the BoE would hope to stimulate bank lending and improve the pace of economic recovery. The downside for sterling however, is that such a move would likely prompt a fall in interbank interest rates (as there would no longer be an interest rate advantage to holding cash), making sterling even less attractive. The Swedish Riksbank has already done exactly that, pushing market interest rates down to just 0.25%. Meanwhile, the US dollar has been rising slightly against the Euro, and taking advantage of sterling's weakness to rally back below the 1.60 level. We also traded below the June low yesterday (1.5802) which adds to the technical pressure building against the pound. The US is widely perceived to be recovering at a faster pace than the UK, which is lagging. That means the Federal Reserve may remain ahead of the curve when it comes to reversing quantitative easing. We advise clients with USD requirements to cover at least half now to avoid the risk of continued downside.

Sterling rallied this morning after the minutes of the last Bank of England meeting revealed that all nine members of the MPC voted to keep the central bank' asset purchase programme on hold at £175bn. It was the revelation that three members voted for a larger increase at last month's meeting that helped send the pound sharply lower. This morning's news has provided some relief to the pound, although it's too early to say whether this signals a sustainable reversal in the market.

The pound/dollar rate has been trading towards the lower end of its three month range, but the greenback weakened yesterday as investors continued to seek higher risk/higher yield by selling the currency and buying other assets. That trend looks set to continue as long stock markets remain buoyant. The dollar has declined against most major currencies as a result of this trend, but sterling's extreme weakness has meant that the pound/dollar rate has been treading water rather than making any progress to the upside. The removal of near term uncertainly surrounding the BoE's easing programme could help sterling climb out of the ditch, but we will need to see more technical evidence before taking a decisively positive view again. One near term signal would be sterling's ability (or otherwise) to sustain this morning's break above 1.64. That level is not only horizontal resistance (by virtue of the fact it was a major low point last week and also kept the lid on yesterday's rally) but also marks trend resistance. So a close above there today would tend to stack the odds in favour of a continued rally.

Sterling jumped today after the Bank of England left interest rates unchanged at 0.5% and made no further increases to the quantitative easing programme. 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. Having gained a foothold from the low 1.60s we are now testing resistance just above 1.66. This level has caused problems for sterling in the last month, with recently rejected highs of 1.6667, 1.6624 and 1.6607 still fresh in the minds of many traders. A solid close above 1.66 today should put all that behind us and allow further gains toward the August highs. We advise the use of stop orders below 1.6400 in case of renewed weakness. In the meantime, let's see where this BoE inspired rally can take us.