GBP/USD Forecast: Breaks below the uptrend channel as the UK economy shrinks, Conservative contest begins

The pound trades almost exclusively but it has been unable to ignore horrible figures. The UK economy shrank by 0.4% in April, worse than expected and indicating a hangover in the economy after businesses stockpiled ahead of the original Brexit data – March 29th. 

Manufacturing output dropped by a whopping 3.9% on a monthly basis and 0.8% year on year. Only the trade deficit beat expectations with -12.113 billion pounds.

Overall, Brexit seems to be taking its toll on the economy without even happening – and leaders will now have their say.

Conservative contest

Boris Johnson has begun his march to 10 Downing Street, but he may face fierce competition. The Conservative Party's leadership contest has begun. By the end of the day, we will have the full list of contenders and a marginally better picture of their odds. The contest's rules require all candidates to have minimal support of at least eight MPs. 

Former foreign secretary Boris Johnson has stepped up his campaign by offering a tax cut to wealthy pensioners – seemingly appealing to the party's membership. More importantly for markets, Johnson remains adamant that the UK will leave on October 31st – deal or no deal. The current foreign secretary Jeremy Hunt does not want to stick to a rigid timeline while former Brexit secretary Dominic Raab has reportedly suggested bypassing parliament to ram through a hard Brexit – angering many. 

Other noteworthy names are the former leader of the House of Commons Andrea Leadsom and environment minister Michael Gove – whose candidacy has lost momentum after he admitted to using cocaine in the past. 

It is important to note that what candidates say during the campaign does not necessarily imply her or his actions in Downing Street. Nevertheless, markets will move in response to the contenders' words and odds.

GBP/USD has enjoyed the weakness of the US Dollar that tumbled in response to Friday's weak jobs report. The US gained only 75K positions in May, far fewer than expected and wage growth slowed down – indicating a higher chance of a rate cut. 

The US and Mexico have reached an according to on stemming migrant flows into the US, prompting President Donald Trump to suspend the planned tariffs and cheering markets. 

With few figures due later today, the focus remains on politics – especially the UK leadership contest. 

GBP/USD Technical Analysis

The four-hour chart shows that GBP/USD has been trading within an uptrend channel and is now dipping below it. The breakout still awaits confirmation and the pair may find support at 1.2680 – where the 100 Simple Moving Average meets the price. 

Further support awaits at 1.2670 which was a support line last week and coincides with the 50 SMA. It is closely followed by 1.2640 that marks the beginning of uptrend support, then by 1.26010 which cushioned GBP/USD in early June and late May, and finally at 1.2558 that is the lowest level in four months.

Resistance awaits at 1.2750 which was the former triple top, before Friday's rally which sent it 1.2762. Further up we find 1.2815 and 1.2870.

Momentum is turning negative and the Relative Strength Index is leaning lower. Have the tables turned against the pound?