GBP/USD Forecast: "Death cross" pattern triggered as May ends with Boris Johnson nearing Downing Street

• GBP/USD hit new four-month lows in reaction to PM May's resignation.
• The US-Sino trade tensions, US GDP, and also Carney's testimony are eyed.
• The daily chart shows the 50-day SMA crossing the 200 SMA - the death cross pattern.
• Experts are bearish on GBP/USD in the short-term.

What just happened: May steps down, GBP/USD follows

UK Prime Minister Theresa May has announced she is stepping down, succumbing to overwhelming pressure from members of her own Conservative Party. The embattled leader had tried suggesting a new Brexit deal to parliament, including further compromises -- only to see it backfiring and accelerating her departure. 

The growing prospects of May's departure sent the pound down throughout the week as the main candidate to replace her is former foreign minister Boris Johnson, who has a tougher stance on the UK's exit from the EU. Will Johnson lead the country to a no-deal Brexit? Pound/dollar managed to stabilize when May finally quit, but this was likely a "sell the rumor, buy the fact" reaction. The pound had already dropped considerably.

GBP/USD also advanced on the weakness of the USD. The US-Sino trade war has intensified and resulted in more demand for safe-haven US bonds. Weak US PMIs and housing data further increased demand, and the benchmark 10-year yield eventually dropped to the lowest levels since December 2017. In turn, the fall of yields made the greenback less attractive and triggered a sell-off. Disappointing durable goods orders also weighed on the USD.

In the UK, data was mixed with inflation falling a tad below expectations with 2.1% year over year and retail sales coming out flat, beating early estimates. The political drama overshadowed the economic figures. 

UK events: Watch Boris Johnson

Contenders for May's job will likely present themselves in the upcoming week. While announcements from candidates may cause more uncertainty about the new leader, those who are not running may help shape the race by endorsing those are in the race. If Boris Johnson receives more public support for his leadership, the odds of him making it to Downing Street will rise.

Every word coming out of his mouth will become crucial as he will be the PM in waiting. He will likely persist with his tough stance on Brexit, thus weighing on the pound. After entering office, Johnson may change his mind, but this may take some time. 

See Boris Johnson becomes PM, volatility will rise, but Sterling may not necessarily suffer

The pound may rise if a pro-Remain candidate emerges and is seen as a viable contender. Foreign secretary Jeremey Hunt and pensions minister Amber Rudd are potential candidates. On the Leave side, former Brexit secretary Dominic Raab and Graham Brady may throw their hat into the ring.

Just as markets open, the results of the EU election results will be published. While the UK is on its way out, and the EU parliament's powers are limited, some may see the outcome as a "mini-referendum" on Brexit. Nigel Farage's Brexit Party is set to come on top and pro-Remain parties will likely garner substantial support. Both sides are projected to draw voters from the Conservatives and from Labour. The balance may impact policymakers. 

See EU elections in the UK: Brexit party and pro-Remain camp tussle for influence on Brexit and GBP/USD

The economic calendar features the delayed testimony by Bank of England Governor Mark Carney before parliament. The BOE is waiting to see what happens with Brexit -- like everybody. 

The other events on the calendar will likely have a muted effect on the pound amid the focus on Brexit.

Here are the events lined up in the UK on the forex calendar:

 

US events: Trade tensions and US GDP

Tensions over Huawei, tariffs, and perhaps new topics will likely continue setting the tone in markets for another week. Several commercial banks such as Goldman Sachs and JP Morgan now incorporate the trade war into their forecasts, and others may join them.

Additional housing data and the Conference Board's consumer confidence gauge kick off the week after a holiday on Monday, and will likely show ongoing improvement. The Fed's Beige Book is also expected to provide a relatively rosy picture of the US economy. 

The most significant economic figure is due on Thursday with an update on GDP growth. The US economy grew at an annualized rate of 3.2% in the first quarter, according to the first release. Economists project a minor downgrade. The inflation component in the report is also of high importance after it has badly disappointed in the initial publication. 

Core PCE is the main publication on Friday. The Fed's preferred inflation measure has probably risen in April after decelerating to 1.6% in March. An increase will vindicate the Fed's assertion that slow first quarter inflation was transitory.

Here are the scheduled events in the US:

GBP/USD Technical Analysis 

GBP/USD is experiencing oversold conditions according to the Relative Strength Index which is just below 30 which separates normal from oversold conditions -- implying a potential bounce. Other indicators point to further falls. The 50-day Simple Moving Average is crossing the 200-day one, which is the "death cross pattern.". GBP/USD is trading below all the major SMAs, and downside momentum persists. 

Support awaits at 1.2605, which was the low point so far this month. The next line to watch is 1.2530 that was a swing low in December, followed by 1.2480, which was a stubborn support line around that time. Next, we find 1.2430.

Resistance awaits at 1.2720 which capped cable when Theresa May announced her resignation. It is followed by 1.2775, the February low, and then by 1.2820 that held pound/dollar down early this week. The next lines are 1.2870 and 1.2920.

GBP/USD Sentiment

Fears of a hard-Brexiteer in 10 Downing Street and further US-Sino tensions will likely send GBP/USD lower despite falling US yields.

The FXStreet Poll shows a bearish forecast in the near term, and a bullish one afterward. The short-term average target dropped substantially but the other ones have dropped only moderately. Perhaps experts think the bottom is close.

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