A method of encoding a video signal comprising: via computer processing hardware: receiving (6.01) a plane of the video signal at a first resolution, the plane comprising a plane of pixels; downsampling (6.01) the plane of the video signal to generate a rendition of the plane at a second resolution, the second resolution being lower than the first resolution; producing (6.01, 6.02) a predicted plane of the signal at the first resolution by obtaining an encoded plane of the signal at the second resolution and upsampling a simulated decoding of the encoded plane of the signal at the second resolution; producing (6.02) residual data as a difference between the received plane of the video signal at the first resolution and the predicted plane of the video signal at the first resolution; processing (6.03, 6.04) the residual data using a directional decomposition to generate sets of directional components, the directional decomposition being applied to 2×2 blocks of residuals to generate, for each 2×2 block, four directional components: A ― an average of the block of residuals, H ― a horizontal difference within the block of residuals, V ― a vertical difference within the block of residuals, and D ― a diagonal difference within the block of residuals; deriving (6.05) sets of transformed residuals from the sets of directional components by adjusting the average directional component of each set of directional components, including: determining a predicted average for each 2×2 block as a difference between a quantized pixel value at the second resolution representative of the block and an average of a corresponding block in the predicted plane of the signal, and subtracting the predicted average from the average directional component for the block of residuals; quantizing (6.06) the sets of transformed residuals; and encoding (6.08) the quantized sets of transformed residuals to output encoded reconstruction data for communication to decoder processing hardware for decoding. receiving (6.01) a plane of the video signal at a first resolution, the plane comprising a plane of pixels; downsampling (6.01) the plane of the video signal to generate a rendition of the plane at a second resolution, the second resolution being lower than the first resolution; producing (6.01, 6.02) a predicted plane of the signal at the first resolution by obtaining an encoded plane of the signal at the second resolution and upsampling a simulated decoding of the encoded plane of the signal at the second resolution; producing (6.02) residual data as a difference between the received plane of the video signal at the first resolution and the predicted plane of the video signal at the first resolution; processing (6.03, 6.04) the residual data using a directional decomposition to generate sets of directional components, the directional decomposition being applied to 2×2 blocks of residuals to generate, for each 2×2 block, four directional components: A ― an average of the block of residuals, H ― a horizontal difference within the block of residuals, V ― a vertical difference within the block of residuals, and D ― a diagonal difference within the block of residuals; A ― an average of the block of residuals, H ― a horizontal difference within the block of residuals, V ― a vertical difference within the block of residuals, and D ― a diagonal difference within the block of residuals; deriving (6.05) sets of transformed residuals from the sets of directional components by adjusting the average directional component of each set of directional components, including: determining a predicted average for each 2×2 block as a difference between a quantized pixel value at the second resolution representative of the block and an average of a corresponding block in the predicted plane of the signal, and subtracting the predicted average from the average directional component for the block of residuals; quantizing (6.06) the sets of transformed residuals; and encoding (6.08) the quantized sets of transformed residuals to output encoded reconstruction data for communication to decoder processing hardware for decoding. determining a predicted average for each 2×2 block as a difference between a quantized pixel value at the second resolution representative of the block and an average of a corresponding block in the predicted plane of the signal, and subtracting the predicted average from the average directional component for the block of residuals; quantizing (6.06) the sets of transformed residuals; and encoding (6.08) the quantized sets of transformed residuals to output encoded reconstruction data for communication to decoder processing hardware for decoding.