DAX Set for a Bearish Open on China Stats and ECB Policy Uncertainty

It was a bullish Wednesday session, with the DAX gaining 0.49%. Following a 0.83% rise on Tuesday, the DAX ended the day at 16,311. Significantly, the DAX struck a new all-time high of 16,336 on the way to a three-day winning streak.

Euro area and US economic indicators delivered a bullish start to the session. The softer US CPI Report and fall in the US producer price index supported a more dovish Fed monetary policy stance. However, the upside for the DAX was modest, with the markets betting on a July Fed interest rate hike ahead of the Fed interest rate decision and projections.

The US equity markets responded to a hawkish Fed pause. The NASDAQ Composite Index and the S&P 500 gave up early gains to end the day up 0.39% and 0.08%, respectively, with the Dow declining by 0.68%.

On Wednesday, the Fed left interest rates unchanged but signaled more rate hikes and a peak rate of 5.6%. While the Fed penciled in two more rate hikes, Fed Chair Powell offered optimism in the press conference, noting that conditions are falling in line to tame inflation while saying,

“But the process of that actually working on inflation is going to take some time.”

The FOMC projections were hawkish, with the Fed expecting unemployment to reach 4.1% by the end of 2023, down from the 4.5% projection in March. However, the Fed projected the Core PCE Price Index to sit at 3.9% by the end of the year versus 3.6% in March, suggesting the Fed could go higher than a peak rate of 5.6%.

The economic projections removed any near-term concerns of a hard landing, with the Fed projecting real GDP to rise by 1.0% versus 0.4% in March.

Euro Area and US Economic Indicators Offer Support

German wholesale inflation and Eurozone industrial production numbers drew interest early in the day. The numbers were DAX-friendly, with German wholesale prices falling by 1.1% in May. Year-on-year, the German wholesale price index fell by 2.6% versus a 0.5% decline in April.

While the softer inflation numbers should ease pressure on the ECB to push aggressively higher, the numbers also reflected weak demand.

Eurozone industrial production increased by 1.0% in April. The increase was modest compared to the 3.8% tumble in March, with euro area manufacturers struggling on weak demand.

US wholesale inflation numbers came in cooler than expected. The US producer price index increased by 1.1% in May versus a forecasted 1.5% rise. In April, the index was up 2.3%.

Considering the US economic indicators and the FOMC economic projections, the probability of a July 25-basis point Fed interest rate hike increased from 60.3% to 65.7% overnight. However, according to the CME FedWatch Tool, the chances of a 50-basis point hike fell from 4.3% to 0.0%.

The Market Movers

It was another bullish day for the auto sector. Continental and Mercedes-Benz Group led the way, rising by 1.78% and 1.30%, respectively.

BMW and Volkswagen ended the day up 0.75% and 0.69%, respectively, with Porsche up 0.59%.

It was also a bullish session for the banks. Commerzbank and Deutsche Bank ended the day with gains of 0.94% and 0.71%, respectively.

The Day Ahead for the DAX

It is a busy day on the European economic calendar. Finalized French inflation numbers for May will draw interest ahead of trade data for the Eurozone. The trade data should have more influence, barring an upward revision to the inflation numbers.

However, the ECB interest rate decision and all-important press conference will have more impact. Economists expect the ECB to lift interest rates by 25 basis points. A 25-basis point hike would leave the DAX in the hands of ECB President Christine Lagarde. Following a hawkish Fed pause, a hawkish ECB hike would pressure the DAX.

With the euro area economy forming cracks in response to aggressive maneuvers to tackle inflation, the outlook on inflation and the economy will also be material.

Looking ahead to the US session, it is a busy day on the economic calendar. US retail sales, jobless claims, Philly Fed Manufacturing, and NY Empire State Manufacturing numbers will draw interest.

DAX Technical Indicators

Resistance & Support Levels

The DAX has to avoid the 16,288 pivot to target the First Major Resistance Level (R1) at 16,359. A move through the Wednesday high of 16,336 would send a bullish signal. However, the DAX would need the ECB and US economic indicators to support a breakout.

In the case of an extended rally, the bulls will likely test the Second Major Resistance Level (R2) at 16,406. The Third Major Resistance Level (R3) sits at 16,524.

A fall through the pivot would bring the First Major Support Level (S1) at 16,241 into play. However, barring an ECB-fueled sell-off, the DAX should avoid sub-16,200 and the Second Major Support Level (S2) at 16,170. The Third Major Support Level (S3) sits at 16,052.

Looking at the EMAs and the 4-hourly chart, the EMAs sent bullish signals. The DAX sat above the 50-day EMA (16,029). The 50-day EMA pulled further away from the 100-day EMA, with the 100-day EMA widening from the 200-day EMA, delivering bullish signals.

A hold above the Major Support Levels and the 50-day EMA (16,029) would support a breakout from R1 (16,359) to give the bulls a run at R2 (16,406). However, a fall through S1 ($16,241) would bring S2 (16,170) into view. A fall through the 50-day EMA (16,029) would signal a near-term bullish trend reversal.

The DAX Futures Sees Red

Across the futures markets, DAX was down 22 points, with the Dow and NASDAQ falling by 13 and 1 point, respectively.

This morning, economic indicators from China set the tone. Industrial production increased by 3.5% year-over-year in May versus a forecasted 3.8%. In April, industrial production rose by 4.7%.

Other stats were also bearish for riskier assets. Fixed asset investment increased by 4.0% year-over-year versus 4.7% in April. Economists forecast a 4.4% increase. Retail sales growth slowed midway through Q2, with retail sales up 12.7% year-over-year versus 18.4% in April. Economists forecast sales to increase by 13.7%.

For a look at the economic events, check out our economic calendar.