GBP/USD Forecast: The falls may not be over as Johnson may replace May already in May

GBP/USD is trading at a fresh four-month low on growing political uncertainty.
The pound also suffers from weak inflation and the US-Sino trade war.
The technical outlook is bearish for the currency pair.

Yohay Elam FXStreet

UK PM Theresa May has pledged to set out a timetable for her departure in early June, but she may leave Downing Street earlier than anticipated and fear of seeing her former Foreign Secretary Boris Johnson as PM spooks the pound.

After a lengthy cabinet meeting, the embattled PM faced the press and announced a "new deal" for parliament on Brexit. She tried to please Remain supporters by opening the door to a customs union and also a second referendum. These hopes sent GBP/USD soaring above 1.2800, but the move was shortlived.

Her new deal not only failed to convince proponents of a harder Brexit, but was also shrugged off by Remain supporters. Moreover, British media outlets report that members of her Conservative Party are calling for to abandon her new deal and quit shortly.

Environment minister Michael Gove that supported May, said she would surely remain in office next Tuesday, but also said that Johnson would be a good PM, but markets may not necessarily agree.

Johnson, who also served as Mayor of London, supports a harder version of Brexit and is seen as an erratic figure, prone to gaffes. He may change his mind later on, but at least in the short term, markets are wary.

The Tory plotters will likely wait for the results of the European Parliament elections, which they never wanted to participate in. The Conservative Party is forecast to lose many votes to Nigel Farage's Brexit Party.

Outside Westminster, UK inflation came out slightly at 2.1% year over year in April, below 2.2% that was expected. The news does not help Sterling.

On the other side of the equation, the intensifying trade tensions between the US and China push the safe-haven dollar higher. According to US media, the Trump administration is considering banning several Chinese surveillance firms, in addition to blacklisting Huawei, the telecom giant.

All in all, the fundamental picture is bleak. Technicals are not much better either.

GBP/USD Technical Analysis

GBP/USD suffers from downside Momentum on the four-chart and it trades below the 50, 100, and 200 Simple Moving Average. Moreover, the Relative Strength Index is above 30, thus not indicating oversold conditions.

At the time of writing, the fresh four-month low of 1.2660 provides immediate support. It is followed by 1.2610 which was a temporary low earlier this year and 1.2530 that was a swing low in December 2018.

Some resistance awaits at 1.2685, Tuesday's low. It is followed by 1.2710 that was a low point late last week. Next up we find 1.2775 which was the low point in February.

Author

Yohay Elam

FXStreet

Yohay is in Forex since 2008 when he founded Forex Crunch, a blog crafted in his free time that turned into a fully-fledged currency website later sold to Finixio.

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