Last Wednesday's quarterly inflation report put sterling on the back foot, sending it reeling down towards 1.6500. It wasn't so much the data that hurt, since we already knew that inflation had declined to just 1.1% in September. Gloomy comments by governorMervyn Kingkept markets guessing over whether further quantitative easing is in the pipeline. "We have a completely open mind as to whether to do more asset purchases..." was the phrase that sterling took exception to.

However, by Thursday the pound was bouncing back as the wider market decided that the comments were designed to avoid any further disappointment should the bank chose to extend the QE programme. That could be symptomatic of the general sterling trend lately. An initial kneejerk reaction to bad news/comment seems to be followed by a swift rebound as investors struggle to find new reasons to sell the pound.

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.

Sterling was marching steadily higher through mid October until we hit a major stumbling block on Friday 23rd. Third quarter growth figures didn't show any growth at all. In fact the economy contracted by 0.4% instead of the 0.2% expansion that analysts were expecting.

That prompted a vicious sell off, sending the pound three cents lower almost immediately. Last week was somewhat better as the stock markets finally entered correction territory, sending investors scurrying away from high yield currencies and into more defensive plays including the dollar and pound.

By Thursday/Friday the previous week's growth shocker was looking more like a blip as sterling rose to new six week highs against the euro. However, the "safe haven" status of the dollar has meant that the pound/dollar rate has remained subdued and we are still trading in the middle of the two week range.

Much now depends on the Bank of England meeting this Thursday (November 5th). It seems to have come around very quickly after they elected to keep interest rates and quantitative easing on hold in October. Another "no change" vote would certainly help sterling's cause this week, especially if the subsequent meeting minutes (usually released a few days later) show another 9-0 vote.

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.