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DAX rebounds despite ECB hawkish tones; eyes on rates and growth at this week's meeting


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DAX rebounds despite ECB's unexpected hawkish stance. This week's meeting takes center stage for insights on rates and growth. Technical analyses for DAX and FTSE highlight key levels.

 

original-size.webpSource: Bloomberg

 

 Written by: Tony Sycamore | Market Analyst, Australia | Publication date: 

Overnight, the German stock market, the DAX extended its rebound, driven by gains in the tech sector.

Its recovery in recent days has come despite ECB members sounding more hawkish than expected ahead of this week's meeting; despite evidence of slower growth and falls in underlying inflation.

What is expected from this week's ECB meeting?

At its last meeting in December, the ECB kept its deposit rate on hold at 4.00%, as widely expected. The ECB noted that with interest rates at this level, it will make a "substantial contribution" to returning CPI to its 2% goal in 2025. Inflation data for December received in early January showed core inflation cooling to 3.4%, the lowest since March 2022, and headline inflation stayed below 3%.

While this shows that tighter monetary policy settings are winning the battle against high inflation, tighter monetary policy also impacts growth and activity data. Reflecting concerns that the European economy, led by Germany, will enter recession in 2024, the European rates market is pricing in 130bp of ECB rate cuts for 2024.

Nonetheless, in the lead-up to this week's meeting, ECB officials, including president Lagarde, have noted that aggressive pricing of rate cuts is not "helping our fight against inflation". As such, the ECB is expected to keep rates on hold this week and reiterate that rates will be set "at sufficiently restrictive levels for as long as necessary."

ECB deposit rate chart

 

original-size.webpSource: TradingEconomics

DAX technical analysis

In our last update, we noted that a sustained break below support at 16,600/500 would increase the chances that a medium-term high was in place in the DAX at the early January 17,123 high.

However, given the brief time that the DAX spent trading below the bottom of the support band and the three-wave nature of the decline, it is likely that the decline was a correction, and that the DAX can push to new highs in the 17,200/400 area.

In summary, providing the DAX holds above support 16450ish, we expect a retest of the January 7,123 high before a move towards 17,200/400.

DAX daily chart

 

original-size.webpSource: TradingView

FTSE technical analysis

In the final weeks of December 2023, the FTSE broke higher above the 200-day moving average at 7570 before running into a cluster of horizontal resistance near 7750, highlighted on the chart below.

Since then, the FTSE has erased all of its December gains despite a favourable tailwind from US stock indices in recent days, which isn't a particularly encouraging sign.

As such, while the FTSE remains below the 200-day moving average at 7567 (sustained basis), the risks are for a deeper decline in the coming sessions towards range lows, 7300/7200.

FTSE daily chart

 

original-size.webpSource: TradingView

  • Source: TradingView. The figures stated are as of 23 January 2024. Past performance is not a reliable indicator of future performance. This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation.

 

 

This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.

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