DAX, Gold Outlook: Two Trades to Watch

DAX eases after a week of strong gains

• US soft landing hopes have boosted sentiment this week
• ECB minutes point to more rate hikes to come
• DAX runs into resistance at 16200

The DAX, along with its European peers is set to open modestly lower on profit-taking after a strong week of gains.

The DAX is on track to book gains of almost 3.5% across the week, rebounding from 3.3% losses the last week.

The gains this week have been fueled by optimism that rapidly cooling inflation in the US suggests that the Federal Reserve could be close to concluding its rate hiking cycle. The market expects just one more rate hike in July and is growing in confidence that the US economy, the world’s largest economy could avoid a recession.

However, this is in contrast to the eurozone area after the ECB minutes of the June meeting revealed that the central bank reiterated policymakers’ determination to continue hiking interest rates beyond the next meeting, even as inflation is cooling.

German wholesale prices dropped sharply in June, falling by -2.9% YoY, marking the steepest decline in 3 years, in a sign that inflation in Europe’s largest economy will continue to ease.  However, recession worries remain after weaker ZEW economic sentiment data earlier in the week dropped by more than expected, raising concerns of a prolonged recession.

Looking ahead, eurozone trade data and US Michigan consumer confidence will be in focus as well as US banks’ earnings as they kick off Q2 earnings season.

DAX outlook – technical analysis

After rebounding off 15450, the DAX has risen above its 20, 50 & 100 sma, running into resistance just below 16200 the early July high.

Bulls, supported by the RSI above 50 and the bullish crossover on the MACD will need to overcome this level in order to extend the bullish run higher towards 16335, the May high and 16430 the all-time high.

Meanwhile, support can be seen at 15775 the 100 sma. The price has traded above the 100 sma since October last year. Sellers need to break below 15450 to create a lower low.  

Gold bulls pausing for breath

• Gold is set to gain 1.65% this week on easing Fed bets
• US Michigan consumer confidence data is due
• Gold testing resistance at 1955

Gold prices are edging lower, snapping a 5-day winning run and slipping away from the monthly high reached earlier in the week.

Yesterday PPI eased to 0.1% YoY, down from 0.9% and below forecasts of 0.4%. The data came after US CPI cooled by more than expected to 3% YoY in May. Cooling US inflation data, combined with softer US jobs data is boosting expectations that the Fed’s rate hikes are working and that the central bank could be close to ending its rate hiking cycle.

The market is pricing in a 92% probability of a 25 basis point rate hike this month and just an 18% probability of another rate hike later this year, down from 30% just a week ago.

The reassessing of Fed rate hike expectations comes despite Federal Reserve official Christopher Waller saying that he still supports two more rate hikes this year. Waller believes that the Fed’s 5% point of rate hikes have already had their impact on the economy, which means that more hikes could be needed. Although he also said that if CPI continues to cool significantly across the next two months, then a September rate hike may not be necessary.

Still optimism of the Fed being close to peak rates is good news for non-yielding gold. The weaker USD, which trades at a 2023 low versus major peers is also supportive of the the precious metal.

Attention now turns to US Michigan confidence data which is expected to improve to 65.5 in July from 64.4 in June, as easing inflation boosts consumer’s mood.

Gold outlook – technical analysis

Gold broke out of its descending channel dating back to early May and is testing resistance at 1955, the confluence of the 50 & 100 sma.

A move above this resistance, opens the door to 1973 the June high and April low, before brining 2000 psychological level back into play.

On the downside, should sellers successfully defend 1955, bears could look to test1928 the 20 sma, negating the near-term uptrend.