GBP/USD: At Critical Support

• GBP/USD trades at four-month lows amid a deteriorating political outlook in the UK.
• Cross-party trade talks and US-Sino negotiations are both set to collapse.
• However, the four-hour chart shows oversold conditions, implying a temporary bounce.

"Boris Johnson, PM", is a headline that may soon front newspapers, and markets are not to so enthusiastic about it. Backbenchers of the ruling Conservative Party have shown PM Theresa May the door. She pledged to set out a timetable for stepping down in early June, just after the next Brexit vote and regardless of the result. Johnson, a staunch Brexiteer is the leading candidate to replace her.

If the former Foreign Secretary enters Downing Street, he may take the UK out of the EU without a deal, the worst case for markets. 

The opposition Labour party will likely end the cross-party talks now that May is on her way out. Leader Jeremy Corbyn is reportedly warming up to supporting a second referendum. If this option of potentially reversing Brexit altogether gains traction, the pound will have room to recover.

The internal UK discussions are not the only ones on the brink of collapse. The Chinese media says the country is no longer interested in talks with the US as the US blacklist on Huwaei, a telecommunications giant comes into effect today. The deterioration weighs on markets and pushes the safe-haven greenback higher.

Later today, US consumer sentiment will be of interest.

See Michigan Consumer Sentiment Preview: Growth, jobs and sentiment

Overall, political developments in the UK and also later in the US are set to dominate. 

GBP/USD Technical Analysis - Oversold

GBP/USD is trading very close to the February low of 1.2775. A drop below this level will already send it to the lowest since January. However, the Relative Strength Index on the four-hour chart is well below 30, indicating oversold conditions. This extreme position implies a rebound may be coming. 

Other indicators remain bearish: the 50 Simple Moving Average crossed the 200 SMA, the "death cross" pattern. In addition, downside Momentum prevails.

The 1.2775 level mentioned earlier is critical. A drop below it will open the door to 1.2670 that was a swing low in January. It is followed by 1.2620 which dates back to December last year. 

Resistance awaits at 1.2830 which was a temporary support line on the way down. It is followed by 1.2900 that provided support as well, and 1.2925 that capped a recovery attempt.

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