Talking Points:
- Inflation concerns remain but indices manage to regain bullish momentum
- DAX 30 sees record high
- EUR/USD takes advantage of USD selling
Despite renewed positive momentum, European and US indices are struggling to hold on to recent gains as inflation concerns continue to keep traders wary about further upside. Inflation expectations are not restricted to investment professionals anymore, with the wider public becoming more aware of what direction prices are expected to move in. As consumers foresee more inflation then we can expect them to protect themselves against this expected rise in prices, which will only put further pressure on inflation.
Whilst inflation is good, as it breathes life into an economy recovering from a recession, the Fed needs to be careful that it doesn’t get out of hand and diminish its power to act. This is also keeping expectations of a rate cut before 2023 alive, as investors price in a more hawkish Fed in the coming months. The true test will be at the end of the summer, as that will be the time when we can gauge whether inflationary pressures are transitory, just as the Fed has been reiterating for a few months, or if higher prices are here for the long run.
DAX 30 Levels
With regards to the stock market, the inflation argument is keeping tech stocks under pressure as smaller cyclical stocks are outperforming. The DAX 30 is one of the most tech-heavy indices in Europe, which has caused the German index to retrace heavily in the last week as the Nasdaq was leading the declines. But the last few sessions have seen some strong positive momentum and have managed to take the index to a new record high, breaking above the previous resistance at 15,518.
That said, the DAX 30 has come off slightly since the high this morning and is now below 15,500 once again, trapped between that resistance and 15,424, its 127.2% Fibonacci extension which is offering strong support. The index has already battled with this area twice before so we may see another pullback before further momentum is achieved, although the technical setup this time is more bullish, so watch out for a break above 15,518 to confirm further upside in the short term.
DAX 30 Daily chart
EUR/USD Levels
EUR/USD is trading higher as the US Dollar retreats. Momentum in the US currency changed on Thursday, which allowed EUR/USD to catch up from the 1% drop it saw at the beginning of the week on the back of heavy USD buying. The daily chart shows how the pair retraced back to its mean-reverting level within its Bollinger Bands, offering the support needed to bounce back up.
The bullish momentum seen this morning has pierced through the 1.2182 resistance line, consolidating further momentum in the short term. I would have but expected EUR/USD to see some sideways trading around this area before another move higher, but it may be a case of holding on just above 1.22 until further buyers come into the market. As for resistance, 1.2220 has been a rejection area in the past so it may be worth keeping an eye out, but other than that the path seems to be clear up until 1.2245.
EUR/USD Daily Chart
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— Written by Daniela Sabin Hathorn, Market Analyst
Follow Daniela on Twitter @HathornSabin
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