GBP/USD recouped ground in Thursday’s Asian session, trading around 1.3175 and holding above 1.3150, while markets looked ahead to the US May Personal Consumption Expenditures (PCE) inflation release. Expectations of further US interest rate hikes and a more hawkish Federal Reserve have supported the Dollar, while UK political uncertainty has added to the pound’s headwinds following Prime Minister Keir Starmer’s resignation on Monday after Andy Burnham won the Makerfield by-election, forcing the Labour Party to choose a new leader.
Technically, the pair drifted to a low just under 1.3150 on Wednesday before a modest late rebound, leaving price still close to recent lows. The daily chart shows GBP/USD breaking below both the 50-day Exponential Moving Average (EMA) and the 200-day EMA, which have converged near 1.3400 and are acting as resistance about 225 pips above. Below current levels, the next major handle cited is 1.3000, while the daily Stochastic Relative Strength Index (Stoch RSI) sits mid-range rather than in oversold territory.
Political Uncertainty Fuels Bearish Sentiment in GBP/USD
Given the current political instability in the UK, we believe the Pound’s recent rebound is fragile and unlikely to last. The resignation of the Prime Minister has introduced significant uncertainty, creating a bearish outlook for GBP/USD. Any strength back towards the 1.3200 level should be viewed with suspicion.
We are seeing this uncertainty reflected in the market already. Fitch has just placed the UK’s ‘AA-‘ rating on a negative outlook, and the latest Confederation of British Industry (CBI) survey shows business investment intentions have fallen to their lowest point since 2023. Meanwhile, the US economy remains robust, with the most recent Non-Farm Payroll report showing a healthy addition of 210,000 jobs, reinforcing the Federal Reserve’s hawkish stance.
Positioning For Further Downside and Historical Parallels
For the coming weeks, we are positioning for a move lower in GBP/USD, targeting the 1.3000 psychological support level. We are buying put options to express this view, as implied volatility has climbed to a three-month high of 9.5%, suggesting the market is bracing for a larger move. This strategy allows us to define our risk while capitalizing on a potential drop.
This situation is reminiscent of past political shocks that have heavily impacted Sterling. During the political turmoil following the 2016 Brexit vote and the 2022 mini-budget crisis, the Pound saw rapid and severe declines against the Dollar. History suggests that political uncertainty is a powerful driver of currency weakness for the UK.
The technical chart confirms our bearish bias, showing a thick band of resistance around the 1.3400 mark where key moving averages have converged. We see little technical support until the 1.3000 handle, and indicators are not yet in oversold territory, leaving ample room for a further decline. The upcoming US PCE inflation data will be the next major catalyst and could accelerate this downward trend if it comes in hot.
