DAX: European stocks wobble as inflation jumps to new high

So, there are still no signs of peak inflation in Eurozone as CPI climbed to a fresh record high of 8.1% in May and with oil prices back around $120 per barrel, things could unfortunately get worse. Rising price levels presents a massive dilemma for the ECB: should it need to act more aggressively to tackle inflation or keep policy loose because the already-struggling Eurozone economy will need as much support as it can get? Surging inflation and oil prices will only exacerbate economic woes for businesses and households in the months ahead. This will likely result in lower economic output, regardless of the ECB’s response, even if raising interest rates back above zero looks like a certainty. Against this backdrop, European stocks are likely to struggle to sustain a positive trend.

Brent oil prices climbed to $120 per barrel afterEU leaders finally approved to ban Russian oil imports, thus restricting global supplies further, while optimism about China re-opening from lockdowns simultaneously boosted the demand outlook.

Rising oil prices will continue to filter through the economy, raising costs for households and businesses further. There are no signs of inflation peaking just yet as Eurozone CPI jumped to 8.1% y/y in May vs. 7.7% expected and up from 7.4% in April. Higher inflation rates will raise serious question marks about the ECB’s viewpoint on whether gradual rate increases will be enough to deal with such high price growth. Investors are starting to project a faster pace of tightening from the ECB, which could be another factor holding stocks back. Money markets are now expecting a 115 basis points worth of tightening by the ECB by year-end, up from 110 bps at the end of last week. There are 40% odds of a 50-bps rate hike in July.

So, it is worth watching European stocks and indices such as the DAX for potential weakness as worries about economic outlook intensify and ECB turns even more hawkish.

The German index has reached resistance at 14600 and has reacted by going down about 150 points from there. This level was previously resistance. After three days of decent gains, it is hardly surprising to see the weakness today, in what still is a bear trend. The first line of key support is around 14280, last week’s high. Below that 14105 is the head of the hammer/doji candle created last Wednesday.

Get used to continued choppy price action as we transition to June and towards the summer months. I don’t think we will see sustained periods of intense buying like last year or years before. This time, inflation is the difference and central banks’ hands are tied.

The information on this web site is not targeted at the general public of any particular country. It is not intended for distribution to residents in any country where such distribution or use would contravene any local law or regulatory requirement. The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. Any references to historical price movements or levels is informational based on our analysis and we do not represent or warranty that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.

Futures, Options on Futures, Foreign Exchange and other leveraged products involves significant risk of loss and is not suitable for all investors. Losses can exceed your deposits. Increasing leverage increases risk. Spot Gold and Silver contracts are not subject to regulation under the U.S. Commodity Exchange Act. Contracts for Difference (CFDs) are not available for US residents. Products and services available depend on your location and the entity holding your account. Before deciding to trade forex, commodity futures, or digital assets, you should carefully consider your financial objectives, level of experience and risk appetite. Any opinions, news, research, analyses, prices or other information contained herein is intended as general information about the subject matter covered and is provided with the understanding that we do not provide any investment, legal, or tax advice. You should consult with appropriate counsel or other advisors on all investment, legal, or tax matters. References to FOREX.com or GAIN Capital refer to StoneX Group Inc. and its subsidiaries. Please read Characteristics and Risks of Standardized Options.

Please note that foreign exchange and other leveraged trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved, seeking independent advice if necessary.

FOREX.com is a trading name of GAIN Global Markets Inc. which is authorized and regulated by the Cayman Islands Monetary Authority under the Securities Investment Business Law of the Cayman Islands (as revised) with License number 25033.

FOREX.com may, from time to time, offer payment processing services with respect to card deposits through StoneX Financial Ltd, Moor House First Floor, 120 London Wall, London, EC2Y 5ET.

GAIN Global Markets Inc. has its principal place of business at 30 Independence Blvd, Suite 300 (3rd floor), Warren, NJ 07059, USA., and is a wholly-owned subsidiary of StoneX Group Inc.