GBP/USD Forecast: Dangerously close to the cliff as Britain braces for Boris Johnson

Boris Johnson has been avoiding the spotlight but his presence is felt nonetheless. The leading candidate to lead the Conservative Party and the country has avoided a televised debate with his peers – which have all attacked him. One had suggested that if he cannot cope with friendly peers in the party, he will be unable to confront 27 EU leaders as PM.

The other five contenders that took part in Channel Four's debate clashed on their approaches to Brexit – from Rory Stewart pledge to leave only with a deal to Dominic Raab desire to bypass parliament in order to ram through a hard exit. Markets fear that soft-Brexiteers such as Stewart have no chance while Johnson\s relatively hard line on Brexit will win the day.

GBP/USD is trading close to the four-month low of 1.2558.

MPs will vote on their preferred candidates on Tuesday and will eliminate at least one of the remaining six candidates. The former foreign secretary is set to win the second round as well – and the others compete for second place. The last two men standing will face Tory members in a postal vote. 

Johnson pledged to participate in the next debate organized by the BBC after the vote and there is a potential upside for the pound. If Raab is eliminated, the leading candidate will not have to compete with him on holding the toughest stance on leaving the EU – leaving Johnson as the hardest Brexiteer among the contenders and allowing him to take a softer approach – and pushing Sterling higher.

Yet if he is attacked by Raab – Johnson may veer to harsher stance – and the pound will have room to fall. Skipping the first debate may have also been a way to avoid a confrontation with the more rigid approach that party members like so much.

And while we wait for further developments in UK politics, GBP/USD is still reeling from Friday's upbeat US retail sales figures. Consumption not only grew better than expected in May but the data came on top of considerable upwards revisions for April – painting a rosy picture of the economy in the second quarter – and changing expectations for the Federal Reserve.

The Fed will announce its rate decision on Wednesday and markets foresee two rate cuts this year – these projections seem too high after the consumer data.

See Fed Preview: Five factors that will rock USD in a critical decision

Overall, speculation about UK politics and the Fed decision is set to move GBP/USD

GBP/USD Technical Analysis

GBP/USD has reached a low of 1.2571 earlier in the day – only 13 pips from May's trough of 1.2558 – which was the lowest since January. Will it break lower or bounce? 

The Relative Strength Index on the four-hour chart suggests a bounce – it is just below 30 – implying oversold conditions.

However, downside momentum has intensified and the currency pair trades below the 50, 100, and 200 Simple Moving Averages. 

Below 1.2558, the next lines awaiting Sterling are 1.2475 which was a stubborn low in January, and the 2019 low of 1.2445, also seen that month.

Initial resistance awaits at 1.2600, a round number and the daily high. Next, we find 1.2640 which is where the now-broken uptrend support line began and 1.2660 which provided support last week. 1.2710 is another noteworthy cap.