DAX Set for a Bullish Open as the Focus Turns to the Fed

It was a bearish start to the week. The DAX fell by 1.23% to end the session at 15,727. Significantly, the DAX visited the 16,000 handle for the first time since January 2022 before hitting reverse.

Corporate earnings took a back seat on Tuesday, with euro area economic indicators, banking sector jitters, and sentiment toward central bank monetary policy weighing.

On Tuesday, the NASDAQ Composite Index fell by 1.08%, with the Dow Jones and S&P 500 seeing losses of 1.08% and 1.16%, respectively.

Economic Indicators Weigh on Investor Appetite

On Tuesday, euro area economic indicators weighed on the DAX. An unexpected fall in German retail sales and sticky eurozone inflation hit investor sentiment.

While the retail sales figures are unlikely to influence the ECB, the latest Eurozone inflation figures will likely raise concerns.

According to prelim figures, the Eurozone annual inflation rate accelerated from 6.9% to 7.0% in April. Significantly, the core inflation rate slipped from 5.7% to 5.6%, raising the prospect of a 50-basis point ECB interest rate hike.

Disappointing manufacturing sector PMI numbers added to the bearish mood despite upward revisions to prelim figures. The German Manufacturing PMI fell from 44.7 to 44.5 in April, with the Eurozone’s PMI down from 47.3 to 44.5.

US economic indicators, banking sector jitters, and Republican and Democrat stand-off on the debt ceiling contributed to the Tuesday pullback.

JOLT’s Job Openings fell from 9.974 million to 9.590 million. While the rate of quits was reportedly little changed at 2.5%, the number of quits in the accommodation and food services industry fell by 178,000, a signal of deteriorating sector conditions.

The weaker JOLTs job openings led to a shift in sentiment toward the Fed policy outlook. According to the CME FedWatch Tool, the probability of a 25-basis point May interest rate hike fell from 93.2% to 88.7% in 24 hours. Significantly, the chances of a 25-basis point June interest rate hike fell from 27.7% to 0.50%.

However, a degree of uncertainty over the Fed’s policy outlook remained, with sticky inflation and tight labor market conditions supporting a hawkish Fed interest rate hike.

The Market Movers

It was a bearish day for the auto sector. Mercedes-Benz Group and Porsche saw losses of 1.45% and 1.68%, respectively, with BMW ending the day down by 0.85%. Continental and Volkswagen fell by 0.38 and 0.36%, respectively.

It was also a bearish session for the banks. Commerzbank and Deutsche Bank slid by 4.16% and 3.12%, respectively. US banking sector jitters weighed on bank stocks.

The Day Ahead for the DAX

It is a relatively quiet day ahead on the European economic calendar. Eurozone unemployment numbers will be in focus later this morning. However, barring an unexpected surge in the euro area unemployment rate, we don’t expect the numbers to influence the ECB or the DAX.

Sticky inflation numbers from Tuesday support a hawkish ECB interest rate hike on Thursday, with monetary policy divergence favoring the ECB.

With stats on the light side and inflation in focus, investors should monitor ECB member commentary. ECB Executive Board member Elizabeth McCaul is on the calendar to speak today. However, investors should also monitor the media for ECB comments.

Looking ahead to the US session, it is a busy day on the US economic calendar. The US ADP nonfarm employment change and the all-important ISM Non-Manufacturing PMI will be in focus.

While the markets will consider the stats, the Fed will be the focal point. Investors expect a 25-basis point Fed interest rate hike. However, there is a high degree of uncertainty on whether the Fed will aim to deliver another 25-basis point hike in June.

After the latest Core PCE Price Index numbers, today’s stats could influence the decision and the DAX.

Economists forecast the ADP to report a 150k increase in nonfarm payrolls and for the ISM Non-Manufacturing PMI to rise from 51.2 to 51.8.

While corporate earnings will draw interest, US economic indicators, banking sector-related news, and US Government debt ceiling updates will likely garner greater interest ahead of the Fed.

DAX Technical Indicators

Resistance & Support Levels

The DAX has to move through the 15,816 pivot to target the First Major Resistance Level (R1) at 15,912. A return to 15,900 would send a bullish signal. However, the DAX would need economic indicators and banking sector-related news to support a breakout.

In the case of an extended rally, the bulls will likely test resistance at the Tuesday high of 16,012 but fall short of the Second Major Resistance Level (R2) at 16,120. The Third Major Resistance Level (R3) sits at 16,312.

Failure to move through the pivot would leave the First Major Support Level (S1) at 15,619 in play. However, barring another flight to safety, the DAX should avoid sub-15,600 and the Second Major Support Level (S2) at 15,512. The Third Major Support Level (S3) sits at 15,208.

Looking at the EMAs and the 4-hourly chart, the EMAs send bullish signals. The DAX sits above the 100-day EMA (15,603). 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 move through the 50-day EMA (15,739) would support a breakout from R1 (15,923) to give the bulls a run at the Tuesday high of 16,012. However, a risk-off event would deliver a fall through S1 (15,619) and the 100-day EMA (15,603) to bring S2 (15,512) into view. A move through the 50-day (15,739) would send a bullish signal.

The DAX Futures Sees Green

Looking at the futures markets, DAX was up 79 points, with the NASDAQ mini rising by 5. The Dow mini gained 57.

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