GBPAUD has been trending lower on its 4-hour time frame, moving inside a descending channel connecting the latest highs and lows of price action.

Price just bounced off the bottom of the range and is now making its way to the top, which might continue to hold as resistance.

For now, though, the 100 SMA is holding as a near-term dynamic inflection point around the middle of the channel. If this is enough to keep gains in check, another move towards the channel support could be seen. This short-term SMA is below the longer-term 200 SMA, which suggests that the path of least resistance is to the downside.

Stochastic is already in the overbought region so bullish momentum could be weakening. In addition, RSI is nearing the overbought area so sellers may be ready to take control of price action soon. 

Event risks for this trade setup include the UK services PMI release, as stronger than expected results could lead to a climb up to the channel resistance while weak data could lead to a move towards the bottom. Analysts are expecting to see a dip from 55.9 to 55.6, which would reflect a slower pace of industry expansion.

Earlier today, China reported a weak Caixin services PMI, following yesterday’s downbeat manufacturing PMI release. This is at odds with the government readings released during the previous week, which indicated small improvements in both sectors. The services PMI fell from 51.2 to 50.2 to indicate a slower pace of industry growth, weighing on the Australian dollar and risk sentiment.

Aside from that, the recent selloff in Chinese equities is also weighing on overall market sentiment and the positively-correlated Australian dollar. Further declines are expected since the ban on short-selling of securities is set to expire by the end of the week.

By Kate Curtis from Trader’s Way