GBP/USD forecast: No-deal Brexit fears continue to weigh ahead of Tory leadership contest results

After an initial uptick to a daily high level of 1.2517, the GBP/USD pair met with some fresh supply in reaction to the UK Foreign Office Minister - Sir Alan Duncan's resignation on Monday. This comes on the back of reports, indicating that the UK Finance Minister - Philip Hammond, stands ready to resign if Boris Johnson becomes the next British PM added to the pessimism and kept exerting some downward pressure. The already weaker sentiment surrounding the British Pound deteriorated further after NIESR think tank assigned 40% chance of no-deal Brexit and said there are around 25% chances that the country is already in a “technical recession”. 

The pair dropped to an intraday low level of 1.2456 but managed to recover around 20-pips amid a subdued US Dollar price action, weighed down by the US President Donald Trump's continuous pressure for immediate rate cuts. However, the fact that investors have been scaling back expectations for an aggressive monetary easing by the Fed helped limit any meaningful USD downtick and prompted some fresh selling around the major during the Asian session on Tuesday.

Given that Boris Johnson is more likely to win the Conservative leadership race and get the job of UK PM, rising odds of a no-deal Brexit should hold the GBP bulls on the back-foot. Apart from the UK political/Brexit-related headlines, positive developments surrounding the US-China trade deal added to the USD strength and pave the way for the resumption of the pair's well-established bearish trend. 

From a technical perspective, the pair’s inability to capitalize on the recent corrective bounce from 27-month lows and subsequent weakness for the third consecutive session might have already set the stage for a move back towards challenging the 1.2400 round figure mark. The bearish momentum could further get extended, though is likely to find decent support near the lower end of a near five-month-old descending trend-channel – currently near the 1.2340 region.

On the flip side, immediate resistance is now pegged near the 1.2475-80 region and is closely followed by the 1.2500 psychological mark, which if cleared decisively might prompt some near-term short-covering bounce and lift the pair back towards the 1.2550-60 supply zone. A follow-through buying might negate the near-term bearish outlook and lift the pair further beyond the 1.2600 handle towards testing its next major hurdle near the 1.2655-60 area.