6 min read The pound is on the back foot to start the week, with a political crisis at the top of the UK government weighing on sterling. GBP/USD has slipped to its lowest level since late March, making it the weakest of the major currencies on Monday.
The trigger is Westminster. Weekend reports suggested Prime Minister Keir Starmer could use a Monday statement to set out a timetable for an orderly departure, after a sharp loss of support within his own party. Downing Street has pushed back, indicating on Monday morning that his earlier pledge to stay on and fight still stands, so nothing is confirmed. For now, the pound is trading on the speculation rather than a done deal.
The pressure has been building for weeks. It intensified after Andy Burnham won the Makerfield by-election on Friday, strengthening his position as a potential successor and prompting more Labour figures to call for change. If the Prime Minister does step down, the UK would be on course for its seventh leader in a decade.
Markets tend to dislike this kind of uncertainty. A leadership contest raises questions about who takes over and what it could mean for the direction of fiscal policy, and that uncertainty can quickly spill over into UK assets and the currency. Burnham is the frontrunner, with former Health Secretary Wes Streeting also seen as a leading contender.
The rates backdrop is the other piece of the puzzle. The Bank of England held rates at 3.75% for a fourth straight meeting, though two policymakers voted to hike to 4%, and the Bank trimmed its inflation forecast as energy prices eased following the US-Iran peace deal. Across the Atlantic, the US Federal Reserve held at 3.50% to 3.75% under new chair Kevin Warsh, with a growing number of officials signalling at least one hike this year. With both central banks still leaning towards possible tightening, their relative path could come back into focus once the political dust settles.
For now, sterling appears to be trading on the headlines, and price action could stay choppy until there is more clarity on the leadership question.
The daily timeframe
On the daily chart, GBP/USD is pressing into a broad high-timeframe support area, with key support to watch around 1.3050. Immediate resistance sits at 1.33, and if the pair can stage a bounce, that level could potentially act as the next major hurdle, depending on how the leadership situation plays out.
Above that, a cluster of exponential moving averages, including the 50 and 200 EMAs around 1.34, could potentially come into play as a major high-timeframe resistance zone if 1.33 breaks.
Momentum is stretched. The RSI is deeply oversold, but that on its own is not a signal, as price can stay oversold for an extended period. The more meaningful clue would be a bullish divergence between the RSI and price, similar to the setup at the end of March that preceded a bounce from this area. At the same time, the accumulation/distribution line has broken down, suggesting sellers remain firmly in control for now.
If sterling continues to fall, the next immediate high-timeframe support sits just above 1.30.
The 4-hour timeframe
Zooming in, the 4-hour chart shows clear immediate resistance at around 1.32355. A break above this level, accompanied by the accumulation/distribution line breaking above its own resistance, could potentially open the door to a move up towards the 1.33 region, where resistance sits between the 0.5 and 0.618 Fibonacci retracement levels.
On the other hand, if the situation worsens for sterling, a break below immediate support at around 1.317 could potentially trigger a larger and more volatile move to the downside.
The bottom line: GBP/USD is caught between a deeply oversold technical picture and a fast-moving political story. 1.33 is the level to watch on the upside, while 1.317 is the line in the sand below which selling pressure could accelerate.
Trading involves risk.
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