DAX, GBP/USD Forecast: Two trades to watch

DAX rises after encouraging factory orders and ahead of PMI dara

• German factory orders rise 0.2% MoM vs -1% fall forecast
• German services & composite PMI data due
• DAX rises to test the multi-month falling trendline resistance

The DAX, along with its European peers are set to open the new week on the front for after gains in Asia. Optimism that central banks, including the Federal Reserve, are at the end of their hiking cycle helped the DAX rise over 3.4% last week in its best weekly performance since March.

A series of upbeat earnings combined with a perceived dovish pivot from central banks after several key policy meetings boosted the DAX to a 3-week high.

German factory orders offer some support to the DAX. Factory orders rose 0.2% MoM in September, defying expectations of a 1% decline but still down significantly from the 3.9% gain in August.

Looking ahead, PMI releases will also be in focus. The German services PMI is expected to confirm the preliminary reading of a fall to 48 in October from 50.3. Meanwhile, the composite PMI, which is often considered a good gauge of business activity, is expected to show a deeper contraction of 45.8 in October, down from 46.4.

The data comes after German manufacturing PMI data showed that the sector contracted further in October and acted as a drag on the economy at the start of Q4. Weak data could test the bullish sentiment.

DAX forecast – technical analysis

The DAX has extended its recovery from 1.4600, rising above 15000, the psychological level, and the 20 sma at 15040, to test the multi-month falling trend line resistance. A rise above here and the 50 sma at 15350 brings 15500 into play ahead of the 200 sma at 15650.

Should sellers successfully defend the falling trendline resistance, a break below the 20 sma and 15000 could see 14600 retested.

GBP/USD consolidates after last week’s breakout

• USD struggles after a dovish tilt from the Fed
• BoE Huw Pill and Fed official Lisa Cook to speak
• GBP/USD consolidates above 1.23

GBP/USD dollar is consolidating above 1.23 after booking gains of over 2% in the previous week. Pair trades at a 6-week high as the USD remains vulnerable after last week’s Fed meeting and NFP report.

USD fell to a 6-week low versus its major peers last week after weaker-than-expected US non-farm payroll data supported the view that the Federal Reserve was done with hiking interest rates. U.S. Treasury yields also eased, and traders are now pricing in a 95% probability that the Federal Reserve will not hike interest rates further this year.

The markets are also pricing in an over 80% probability that the Fed will start cutting rates by midway through next year.

While there is no high-impacting U.S. economic data due to be released today, attention will be on Federal Reserve policymaker Lisa Cook, who is due to speak and could shed more light on the future path of US interest rates.

Meanwhile, the pound gained across last week even though the Bank of England left interest rates on hold and indicated that it may have reached the end of its hiking cycle.

Today, attention will be on Bank of England chief economist Huw Pill, who is due to speak. Any comments regarding the future path of interest rates, forward guidance or inflation expectations could influence sterling.

UK construction PMI data will be in focus; however, given that this sector only accounts for around 10% of the economy, it isn’t expected to have a large impact on the pound. Construction PMI is expected to rise to 46 in October from 45.

GBP/USD forecast – technical analysis

GBP/USD broke out of a symmetrical triangle pattern last week, rising above the 50 sma and the October high of 1.2340.  This, combined with the RSI above 50 keeps buyers hopeful of further upside.

Buyers will look for a rise over the 200 sma and 1.2435 in order to bring 1.25 into focus.

Support can be seen at 1.2340, with a break below here exposing the 50 sma at 1.23 ahead of the 20 sma at 1.22.