DAX, GBP/USD Outlook: Two Trades to Watch

DAX starts the week on a cautious note after weak China inflation

• China CPI stagnated at 0%, PPI was at -5.4%
• Sentix investor confidence is expected to fall to -17.9
• DAX finds support at 15450,
• The DAX is starting the week in a cautious manner as investors digest weaker-than-expected Chinese inflation and as they look ahead to the release of eurozone investor sentiment data.

Weaker-than-expected Chinese inflation data showed that CPI stagnated at 0% YoY in June at its lowest rate since 2021. Meanwhile, PPI fell -5.4% in June, dropping at the fastest pace in over seven years. The numbers highlight the struggles that factories are facing and damp domestic demand as the post-pandemic recovery loses momentum.

The numbers suggest that Chinese authorities will consider easing monetary and fiscal policy further in an attempt to avoid a deflationary spiral. The Chinese market is important for German and, more broadly, European exporters.

The data comes ahead of US inflation figures this week, which are expected to show the inflation cooled further and could see investors reassess the likelihood of two Fed rate hikes this year, particularly after Frida’s weaker-than-expected NFP job creation.

Looking ahead, attention turns to Eurozone investor confidence, which is expected to deteriorate further, falling to -17.9 from -17.

The data comes after the eurozone composite PMI was downwardly revised to 49.9 in June, whereby the figure 50 separates expansion from contraction, raising concerns over a prolonged recession in the region.

The US economic calendar is quiet, with Federal Reserve speakers in focus. Any comments regarding inflation or the future path of monetary policy could influence sentiment and the DAX.

DAX outlook – technical analysis

The DAX dropped out of the multi-month rising channel, breaking below its 20, 50 & 100 sma. The price found support on Friday at 15450, which is now the level that selle5rs will look to take out to extend the bearish trend. The RSI below 50 supports further downside.

A break below 15450 opens the door to 15225, the February low, and 15000 round number.

On the upside, buyers will look for a rise above 15730 /15700, the 100 sma, and the June low, to negate the near-term downtrend. A rise above 16000, the 20 & 50 sma brings the all-time highs back into focus.

GBP/USD falls ahead of BoE Andrew Bailey's speech

• Market prices in a 6.5% peak rate
• BoE’s Bailey & several Fed speakers are in focus
• GBP/USD eases from YTD high of 1.2850

GBP/USD is retreating from the year-to-date high of almost 12850 reached on Friday. A rebound in US treasury yields on a mixed market made help lift the US dollar. Meanwhile, pound traders look ahead cautiously to a speech by Bank of England governor Andrew Bailey.

The pound rose last week, boosted by hawkish Bank of England expectations. The market is pricing in a peak rate of 6.5%, with some institutions, such as JP Morgan, suggesting that peak rates could even reach 7% under some scenarios. That said, economists broadly expect interest rates to rise to 5.75%.

While the comparatively hawkish BoE has supported the pound, the economic outlook for the UK is under pressure and fears of a recession could limit further gains.

Households are already being squeezed by high-interest payments and elevated inflation. Further in policy tightening could mean disposable income is hurt further.

Investors will be listening carefully to Bank of England’s Andrew Bailey for clues over the future path of interest rates. When Bailey last spoke at the ECB annual conference, he warned the market that it was incorrect to assume that rates would fall quickly after reaching the peak.

In addition to Andrew Bailey, investors will be listening to Federal Reserve policymakers Loretta Mester, Mary Daly, and Raphael Bostic for clues over the Fed's next steps.

The data comes after US nonfarm payroll report showed that job creation grew at the slowest level in almost two years but as unemployment ticked lower to 3.6% and average earnings came in higher than expected at 4.4%.

This week the major focus will be on US inflation data which is expected to show that consumer prices cooled to 3.1% in June. The market is currently pricing in a 92% probability of the Fed hiking rates by 25 basis points this month and under a 30% probability of a second hike happening between now and the end of the year.

GBP/USD outlook – technical analysis

GBP/USD fell from 1.2850, the YTD high. Although the path of least resistance remains to the upside, amid upward sloping 20, 50 & 100 smas, holding above a multi-month rising trendline and the bullish RSI.

Buyers need to rise above 1.,2850 to extend the bullish trend towards 1.30 psychological level.

On the downside, support can be seen at 1.2725 the 20 sma, which has been tracking the price higher across last week.  A break below here opens the door to 1.2680, the May high, before exposing the 50 sma at 1.2580.