While the “Brexit” possibility may loom large over the Pound, steady fundamental results from the United Kingdom combined with rising asset purchases from the European Central Bank has seen the EURGBP reverse course in recent sessions, threatening to resume the prevailing longer-term downtrend. Although the Bank of England is still far from raising interest rates as it must contend with the risks from the upcoming EU vote combined with less robust fundamentals, the ECB’s degree of accommodation will weigh heavily on the Euro moving forward once the uncertainty dissipates. Whereas a sustained rebound in UK’s underlying fundamentals would add to downside pressures acting on EURGBP, the pair could find itself rising should the UK populace inch closer towards exiting the European Union. With so many risk factors at play, near-term price action will be the most relevant indicator.

Policy Gap Steady For Now

Monetary policy has not been as big a driver of the EURGBP momentum over recent months as evidenced by the Euro’s recovery despite the fact that the ECB is eagerly adding to its balance sheet with monthly bond purchases.The massive divergence in policy after the Europeans took rates negative has failed to produce a measurable amount of depreciation in the currency pair despite the historical relationship that would suggest further downside. Additionally, outside of the already announced measures, the ECB is unlikely to ease further over the medium-term. Evaluation of the efficacy of existing measures will be relevant before any decision is made to accommodate policy further. The real obstacle at the moment remains deflationary pressures with headline consumer prices at 0.00% as of the latest reading.

Even though the BoE has not struck a more hawkish tone, there are several factors that underscore the tightening bias going forward. While holding steady on rates, especially with first quarter growth figures showing slight tapering to 0.40% expansion, the real hurdle to any movement on rates remains the upcoming referendum vote. Less than two months away, this vote could have critical implications for the UK economy and has so far succeeded in driving investment volumes lower as the uncertainty looms.Stable unemployment at 5.10% combined with headline annualized inflation increasing at 0.50%, the fastest pace in 15-months, are laying the groundwork for rate hikes as soon as the 4th quarter, even though the likelihood of a change is low.However, based on the headwinds and anxiety about the “Brexit” vote, the Pound has been largely unable to capitalize on these factors, giving ground versus peers

Technically Speaking

After breaking out from the upward trending equidistant channel formation, the EURGBP pair has been in a steady state of decline over the past three weeks. Channel-based breakouts are among the most volatile of breakouts, even though the current move is accompanied by lower than average volume. Although this can be viewed within two different frames, the first being a correction from the rapid rise of November lows and the second being a reversal, indicators are painting a very mixed picture for the outlook.The 50-day moving average is trending above the price action, acting as resistance against any sustained momentum higher while the 200-day moving average trends below the EURGBP acting as support. Even after the “golden cross” back in January which saw the 50-day moving average cross the 200-day moving average to the upside, traditionally a very bullish sign, momentum has shifted.

The mixed signal produced by the moving averages contrasts with the relative strength index which is rapidly approaching oversold territory combined with Awesome Oscillator pointing to accelerating downward momentum. The oscillator crossover below the zero line is typically viewed as a particularly bearish sign, however, chasing after the most recent downward momentum not be ideal considering the undervalued conditions underlined by the RSI. The key support levels to watch on the downside are 0.7695 and 0.7530. Any break of lower support paves and move below the 200-day moving average opens the way for a full blown reversal lower and resumption of the prevailing longer-term trend.However, should the EURGBP bounce from these levels and overcome resistance of 0.8105 on the upside, it suggests the medium-term trend higher is set to persist.

Conclusion

The EURGBP pair stands at a crucial juncture owing to a host of factors pushing and pulling on the primary and secondary currencies.  Over the medium-term, the biggest factor that could sway the outlook is the upcoming “Brexit” vote with deflation facing Europe and slower growth in the UK potentially leading to an adjustment of forward-looking expectations.While neither the ECB or BoE is forecast to modify policy near-term, near-term price action will define forthcoming directional momentum in EURGBP.While still unknown if the current dip is a correction from the recent move higher or a resumption of the prevailing longer-term downtrend, the impending price movement will be a critical determinant of where the EURGBP heads next.