GBP/USD sent back below rising channel support, capped by 20-D EMA

• Tory leadership contest dominates the headlines. 
• GBP/USD is currently trading at 1.2690 between a range of 1.2683 and 1.2743.
• GBP/USD has been capped by the 20D EMA.

While Brexit headlines continue to dominate, GBP/USD has come under pressure midweek following a short series of higher lows and highs following a correction of the 6th May sell-off from the 1.3470s to the 31st May low down at 1.2560. Today's price action has been choppy, with a promising Services PMI report that helped fuel a delayed bid in the pound only for bears to clean up at the top of the rising channel's resistance which subsequently sent the pound to below the rising channel's support and on to the aforementioned lows for today.

For UK Services (Markit/CIPS), at 51, is a touch better than in April, 'but nevertheless suggests the uncertain backdrop is continuing to weigh on growth," analysts at ING bank argued. "Given that wage growth has been a key pillar of the Bank of England’s argument for further tightening, this latter point suggests that a rate hike later this year shouldn’t be 100% ruled out. Don't forget that Governor Mark Carney hinted back in May that markets are underestimating the central bank's tightening plans."

Meanwhile, from across the pond, U.S. May ISM non-manufacturing index came in at 56.9 vs 55.4 expected, although the abysmal US ADP May employment arriving +27K vs +185K expected more than offset any benefit for the dollar from the services data. There is a keen focus on data from the U.S. considering how raw the recent dovish twist from Bullard and Powell remains this week for the dollar as central bank sentiment overtakes geo-politics, momentarily. 

GBP vulnerable to the political turmoil

On the Brexit front, Boris Johnson, who has insisted the UK must leave by the end of October with or without a deal, is cited as the favourite for the top spot at No10 Downing Street, ahead of Andrea Leadsom, the former leader of Britain's House of Commons, and Michael Gove along with eight, 10 or 12 others chasing the title. Whoever moves into No10 will need to find a solution to the current Brexit deadlock and Johnson is in favour of replacing the Irish backstop - the controversial insurance policy designed to maintain an open border, with "alternative arrangements" so as to facilitate a "managed exit" from the EU. He insisted: "I believe I am best placed to lift this party, beat Jeremy Corbyn and excite people about conservatism and conservative values." Indeed, the pound will remain vulnerable to the political turmoil, with the Tory leadership contest to drag out to late July and most contenders unlikely to try to appeal to the political centre. 

GBP/USD levels

Analysts at Commerzbank argued that the pound will need to regain the 20 day ma at 1.2747 as an absolute minimum in order to alleviate immediate downside pressure and avert further losses to the 1.2444 December 2018 low:

"Minor resistance lies at the 1.2772 February low ahead of the 1.2865 April low. Where are we wrong? Immediate downside pressure will be maintained while no rise above the 200 day moving average at 1.2948 is seen. Next up is the May 10 high at 1.3048. Only if this level were to be exceeded, would we look for the 1.3185/97 April and current May highs to be retested."