DAX: How will EU stocks react to ECB?

The European Central Bank looks set to announce the end of its QE stimulus programme today, as President Mario Draghi and co. have previously indicated.

The European Central Bank looks set to announce the end of its QE stimulus programme today, as President Mario Draghi and co. have previously indicated. But in light of recent negative developments in the financial markets, as well as political uncertainties in the UK, Italy and now France – and not to mention weaker economic growth, due in part to the recent crises in emerging markets –  will the ECB stick to its plans of raising interest rates next year?

If the ECB’s message is very similar to its views back in September then the stock markets may not respond too positively, while the EUR/USD could head sharply higher. Conversely, if the central bank changes its tone and indicates that rates won’t be going up any time soon, then this should be good news for European stocks – perhaps excluding banks, which tend to benefit from higher interest rates – and bad for the euro. That being said, sentiment is quite negative towards stocks at the moment, so any potential ECB-inspired gains could be short-lived.

In our full ECB preview, which you can read HERE, my colleague Matt Weller reckons that the ECB policymakers are likely to revise their forecasts for growth and inflation slightly lower, and will continue to reinvest the proceeds from the central bank’s asset purchases for an extended period of time. But that is as far as the ECB will go in terms of coming across as dovish, says Mr Weller. He points out that “experienced central bankers like Draghi prefer to retain their flexibility whenever possible, and an extension of self-imposed commitment six months in advance seems highly unlikely,” referring to ECB’s commitment to leave interest rates unchanged “at least through the summer of 2019.”

DAX stages oversold bounce from key support area

Ahead of the ECB’s press conference this afternoon, the German benchmark stock index, the DAX, has staged an oversold bounce from long-term support area around 10700. As can be seen on the chart, the area around 10700 marks the point of origin of the big breakout we saw late in 2016. In addition, this area is in close proximity to the long-term 61.8% Fibonacci retracement level (10565). However, the trend is downwards, given the lower lows and lower highs, and this is also reflected in the downward-sloping moving averages, with both the 50 and 200 being well above the market right now. So, while it is possible that the DAX may have formed a low in this technically-important region, the downtrend could easily resume now that the index is testing some key resistance levels, starting at 10950 which has already been tested over the past couple of days. We would only turn bullish on the DAX when it forms a higher high now. The most recent swing high is at 11570. Thus, an eventual break above here would be bullish. Until and unless that happens, the sellers remain in control.

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