EUR/USD, DAX analysis: Hawkish ECB vs. dovish Fed

EUR/USD and DAX takeaways

• Fed Chairman Powell (dovish) and ECB President Lagarde (hawkish) made drastically different comments about interest rates over the weekend.
• EUR/USD’s bearish channel is testing strong support in the 1.0800 area to start the week.
• The DAX may be due for a breather after a big rally to record highs above 16,300 last week.

EUR/USD and DAX fundamental analysis

Over the weekend, investors were treated to diametrically opposite perspectives on monetary policy from either side of the Atlantic.

In the US, Fed Chairman Jerome Powell emphasized that stresses in the banking system would likely keep the Fed from raising interest rates as much as would otherwise be necessary. In a panel discussion with former Fed Chair Bernanke, Powell noted that the Fed has “…come a long way in policy tightening and the stance of policy is restrictive and we face uncertainty about the lagged effects of our tightening so far and about the extent of credit tightening from recent banking stresses. Having come this far, we can afford to look at the data and the evolving outlook to make careful assessments.”

In the wake of Powell’s comments, the market-implied odds of a Fed rate hike next month were cut nearly in half, from almost 40% late last week to closer to 20% now:

Source: CME FedWatch

Meanwhile, ECB President Lagarde showed no signs of wavering from the ECB’s ongoing tightening cycle. In a clear divergence from Powell’s apparent lean toward a pause, Lagarde stated unequivocally that defeating inflation was the ECB’s one and only objective: “It's a time when we have to really buckle up and look at this target that we have and deliver on it. We will take all the measures in order to bring inflation back to 2%. We will do it, no question about it."

For traders who have been paying attention, the relative positions of the two central banks is hardly a surprise, but the clear contrast between Powell and Lagarde’s comments drive the divergence home. At the margin, a pause from the Fed next month and ongoing interest rate hikes from the ECB should support the euro at the expense of the US dollar and provide a potential headwind for major European indices like the DAX.

Euro technical analysis – EUR/USD daily chart

For EUR/USD bulls, it’s been a rough couple of weeks. As the chart below shows, the world’s most widely-traded currency pair has formed a clear bearish channel since the start of the month, shedding more than 300 pips after testing a 1+ year high near 1.1100. For this week, bulls will try to make a stand near previous-resistance-turned-support and the 100-day EMA in the 1.0800 area.

A bounce here and break out of the channel could pave the way for a recovery back toward the 50-day EMA near 1.0900 in short order, whereas a confirmed break below last week’s lows near 1.0770 could expose the 200-day EMA down around 1.0700 next.

Source: Tradingview, StoneX

DAX technical analysis – DAX daily chart

Meanwhile, Germany’s DAX index has benefitted from the recent run of weakness in the euro, briefly setting an all-time record high above 16,300 on Friday before pulling back today. The index has already met its “measured move” objective after breaking out from a high base pattern on Wednesday, suggesting that prices may see a pullback or some consolidation after last week’s volatility.

Source: Tradingview, StoneX

Looking ahead, this week’s technical levels are clear: Resistance sits at 16,300, and if bulls are able to overcome that barrier, a quick move into the mid-16,000s is in play, while support sits down at previous-resistance-turned-support around 16,000, followed by the previous range low at 15,700.

With Eurozone PMIs, Fed minutes, Core PCE, and US debt ceiling negotiations ongoing, there are plenty of catalysts for volatility in EUR/USD and the DAX, but from a purely technical perspective, there’s a strong case for traders to unwind some of last week’s big moves.

-- Written by Matt Weller, Global Head of Research

Follow Matt on Twitter: @MWellerFX