GBPUSD Falls Below 1.25 Amid Political Uncertainty

UK developments

The pound was 0.3% weaker versus the dollar, trading near 1.2495 after Johnson won a confidence vote by a margin of 211 to 148 on Monday evening.

"The currency is suffering amid a lack of international investor confidence in the UK both economically and politically with criticism of Johnson's leadership expected to continue and the potential for government legislation to be blocked by members of his own party" Victoria Scholar, head of investment at Interactive Investor, said today.

Moreover, the seasonally adjusted UK Services Purchasing Managers' Index (PMI) was revised higher to 53.4 in May, up from 51.8 expected and the preliminary reading of 51.8 last month.

The report further said that business activity expansion eases for the second month running. In addition, input costs and prices charged inflation hit fresh record highs. As a result, growth projections are the lowest since October 2020.

Economists at MUFG Bank remain bearish on the GBP, citing the challenging economic outlook ahead, which will be far more difficult to get through with a PM that lacks support.

Short-term neutral

The immediate outlook seems slightly neutral as the latest decline below 1.25 was met with fresh buying. The next support could be at 1.2470, followed by today's lows near 1.2430.

Alternatively, the resistance is expected in the 1.2515 area, where the short-term bearish trend line lies. If the GBP jumps above that level, we might see a relief rally targeting 1.2590.