GBP/USD tests resistance as Labour’s new leader prepares to take power. These are the key levels to watch

Key takeaways

• GBP/USD has recovered from its June lows and is now testing a multi-month resistance ceiling, helped by easing UK political uncertainty.
• Andy Burnham is set to become Prime Minister on 20 July as the only candidate to replace Keir Starmer, and his choice of Chancellor is the next test for sterling.
• A softer-than-expected June US CPI print of 3.5% eased Fed rate-hike bets and pressured the dollar, though the drop was energy-driven and may already be out of date.
• Price is ranging between support around 1.333 and resistance around 1.345, and a break in either direction could trigger the next move.

A supportive political backdrop meets a softer dollar

GBP/USD is pushing back up against a ceiling that has capped it for months, and for once the story behind the move is as much about British politics as it is about the dollar.

After Keir Starmer’s resignation triggered weeks of political uncertainty, sterling has steadied as the succession has become a formality. Andy Burnham is the only candidate to replace him, backed by 349 Labour MPs, enough to make any challenge impossible. He’s expected to be confirmed as Labour leader at a special conference on Friday and to take over as Prime Minister on Monday 20 July. Markets tend to dislike uncertainty more than they dislike any particular outcome, and the removal of that uncertainty has helped the pound recover from its June lows back toward the resistance that has repeatedly capped it this year.

The relief may not go unchallenged. Attention has already shifted to who Burnham picks as Chancellor, the decision that could tell markets most about how he intends to govern. The betting-market favourite is Ed Miliband, who’s widely seen as more fiscally expansive and less wedded to the current fiscal rules than the outgoing Rachel Reeves. Burnham himself has committed to sticking to those rules, but the appointment is the first real test of that promise, and gilt investors are watching it closely given Britain’s already fragile fiscal position.

On the other side of the pair, the dollar has softened. June CPI came in cooler than expected on Tuesday, with headline inflation dropping to 3.5% from 4.2% and prices falling 0.4% on the month, the first monthly decline in around six years. That eased some of the Fed rate-hike expectations that had been supporting the dollar. The catch is that the fall was driven almost entirely by a slide in energy prices during the Middle East ceasefire window, and oil has since surged again as the conflict reignited, so the soft print is arguably already out of date. New Fed Chair Kevin Warsh gave little away in his first congressional testimony on Tuesday, keeping the door open to a possible September hike, with his Senate appearance due later today.

For now, sterling is caught between a domestic political story that has turned supportive and a US inflation picture that could yet firm the dollar back up. We now head over to the charts.

Daily chart

Looking at the daily, we can start with a callback to our previous GBP/USD article. Back then we flagged a divergence to watch on the daily, with price pushing to lower lows while the RSI held equal lows. That played out nicely. Price bounced beautifully off the high-timeframe support we laid out at the time, and the divergence resolved to the upside just as we were watching for.

From that low we’ve had roughly a 300-pip move to the upside, running into the 1.345 area, which is now acting as resistance. Price is currently trading in a range, with support down at 1.333 and that 1.345 level capping the top.

What makes this interesting now is the political backdrop. With Labour’s leader Burnham stepping in to become the UK’s new Prime Minister in the next few days, we have a major catalyst that could potentially move price. The direction of that move is, of course, impossible to forecast, but we do have clear levels to manage our risk around, namely the 1.333 and 1.345 boundaries that price is currently ranging between.

4-hour chart

Dropping down to the 4-hour, we can see a clear range forming. The downside boundary sits at 1.334, and the upside boundary at 1.344 as resistance. A break in either direction could potentially activate a bigger move. From here, it’s all about this political catalyst for GBP/USD.

Key levels to watch

• 1.345: daily resistance, the top of the current range where the recent 300-pip move stalled
• 1.344: 4-hour range resistance
• 1.334: 4-hour range support, the lower boundary
• 1.333: daily range support

A confirmed break above the 1.344 to 1.345 resistance could open the door to a larger move higher, while a break below 1.333 to 1.334 support could activate a move to the downside. With the leadership transition completing in the days ahead, the political catalyst is the one to watch.

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