DAX Set for a Bearish Open on ECB Hawkish Policy Outlook

It was a bearish Thursday session, with the DAX falling by 0.13%. Partially reversing a 0.49% rise from Wednesday, the DAX ended the day at 16,290. Significantly, the DAX ended a three-day winning streak.

Ahead of the European opening bell, 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 in May, with retail sales up 12.7% year-over-year versus 18.4% in April. Economists forecast sales to increase by 13.7%.

However, the euro area and US economic indicators failed to influence, with a hawkish ECB committed to bringing inflation to target, leaving the DAX in the red.

On Thursday, the ECB lifted interest rates by 25 basis points to 4.00%, the highest rate since 2001. Stubbornly elevated inflation forced the ECB into an eighth consecutive interest rate hike. Significantly, the ECB has no plans to take its foot off the gas.

During the ECB press, ECB President Christine Lagarde had this to say about hitting pause,

“In terms of having to pause or having to skip – as I said, number one – we have not discussed it at all, and we have not begun thinking about it because we have work to do.”

ECB projections added to the bearish mood, with ECB staff revising inflation projections from 4.6% to 5.1% for 2023.

While the European boerses struggled, the US equity markets enjoyed a bullish session. US economic indicators were good enough to ease fears of a hard landing while having a limited effect on sentiment toward the Fed.

The NASDAQ Composite Index rose by 1.15%, with the Dow and S&P 500 seeing gains of 1.26% and 1.22%, respectively.

Eurozone Trade Data and US Stats Cushion the Downside

Finalized French inflation and Eurozone trade data were in focus ahead of the ECB policy decision and press conference.

The French annual inflation rate softened from 5.9% to 5.1% in May. However, the numbers were of little comfort to the ECB and its battle to return inflation to target.

Trade data for the Euro area was also bearish, with the Eurozone trade balance falling from a €23.6 billion surplus to an €11.7 billion deficit. Economists forecast a €21.5 billion surplus.

While the euro area stats were bearish, US economic indicators provided support.

US jobless claims held steady at 262k versus a forecasted decline to 250k, while retail sales unexpectedly increased by 0.3% in May.

The jobless claims and manufacturing sector numbers supported a July Fed pause. The all-important Philly Fed Manufacturing Index fell from -10.4 to -13.7, with the prices paid index falling from 10.9 to 10.5. The NY Empire State Manufacturing Index beat forecasts, rising from -31.8 to 6.6, though unlikely to influence the Fed.

The dollar weakened in response to the numbers, while bets on a July Fed rate hike climbed overnight.

According to the CME FedWatch Tool, the probability of a 25-basis point July rate hike stood at 67.0% on Thursday, up from 62.3% on Wednesday.

The Market Movers

It was a mixed day for the auto sector. Porsche and Volkswagen ended the day with losses of 0.83% and 1.26%, respectively.

BMW and Mercedes-Benz Group fell by 0.34% and 0.23%, respectively, while Continental AG gained 0.17%.

It was also a bearish session for the banks. Commerzbank and Deutsche Bank ended the day with losses of 0.64% and 2.96%, respectively.

The Day Ahead for the DAX

It is a relatively quiet day on the European economic calendar. After the hawkish ECB interest rate decision and forward guidance, finalized inflation figures for Italy and the Eurozone will be in focus.

However, the numbers are unlikely to influence, barring upward revisions to prelim figures. According to prelim numbers, the annual inflation rate for the Eurozone softened from 7.0% to 6.1% in May. Elevated inflation leaves pressure on the ECB to persist with further policy moves to bring inflation to target.

With the economic calendar on the light side, ECB commentary would move the dial after the hawkish press conference. ECB President Christine Lagarde and ECB executive Board Member Luis de Guindos are on the calendar to speak today.

Looking ahead to the US session, it is a relatively quiet day on the US economic calendar. Prelim Michigan Consumer Sentiment and Expectation figures for June will be in focus. After a mixed set of numbers on Thursday, the Consumer Sentiment and Expectations Indexes would need to improve markedly for any influence on the Fed policy outlook.

Considering the impact of Thursday’s retail sales and jobless claims on Fed sentiment, a pickup in consumer sentiment would suggest higher demand for goods that could translate into a more hawkish Fed and support a July move.

With the US economic calendar on the light side, Fed chatter will draw interest. FMOC members Bullard and Waller are among the first to speak after the end of the Fed blackout period.

DAX Technical Indicators

Looking at the EMAs and the 4-hourly chart, the EMAs sent bullish signals. The DAX sat above the 50-day EMA (16,055). 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 (16,055) would support a breakout from R1 (16,339) to give the bulls a run at R2 (16,389). However, a fall through S1 (16,203) would bring S2 (16,117) and the 50-day EMA (16,055) into view. A fall through the 50-day EMA would signal a near-term bullish trend reversal.

Resistance & Support Levels

The DAX has to avoid the 16,253 pivot to target the First Major Resistance Level (R1) at 16,339. A move through the Thursday high of 16,302 would send a bullish signal. However, the DAX would need central bank chatter 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 16,389. The Third Major Resistance Level (R3) sits at 16,525.

A fall through the pivot would bring the First Major Support Level (S1) at 16,209 into play. However, barring a central bank-fueled sell-off, the DAX should avoid sub-16,150 and the Second Major Support Level (S2) at 16,117. The Third Major Support Level (S3) sits at 15,981.

The DAX Futures Sees Red

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

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