DAX Pauses After 3-Day Boost from Fed Expectations of 50 bp Cut

Global stocks have been rallying in anticipation of a bumper Fed cut from the FOMC interest rate decision tomorrow.

The DAX has rallied 1.43% from Wednesday after better than expected inflation data from the U.S. The market had previously priced a 25-basis point cut in rates at the upcoming meeting. Inflation data on Wednesday showed better than expected analysts’ forecasts of 2.6%, with a print of 2.5% YoY.

A week ago, the CME FedWatch tool calculated a probability of 34% for a 50 bp cut in rates. Today that likelihood rose to 70% as per the Fed Funds futures pricing. Today’s market has opened with a pause as the index is currently between -0.02% and +0.02% on the day.

We can expect the market to trade within a tight range between today and tomorrow. At least until the policy decision is announced tomorrow evening at 8 pm CET. Later today we have Retail Sales form the U.S. which are expected to show a decline in sales from 2.7% to 2.2%.

Unless there is an extreme deviation from forecasts we can expect the market to remain subdued. The ZEW Economic Sentiment index showed a decline from 19.2 last month to 3.6 today, with little effect on the market.

Technical View

The day chart above for the DAX shows a market in a bullish trend, with the past 18 candles above the Ichimoku cloud. The current bullish leg started after a 3-candle sandwich pattern (blue rectangle).

The pattern gave way to 2 bullish candles; however, yesterday’s candle is a Hammer 1-candle pattern. This type of pattern usually leads to lower prices, but we can’t forget that tomorrow is FOMC day.

The market will find immediate resistance at the previous high of 18,785 (blue line). To the downside, the market will find support at a previous all-time high of 18,601 (black line). Should that level break, the next support is on the Ichimoku cloud.

To consider the market has entered a full bull trend we would need to see a close above the all-time high of 19,000. This is a big hurdle, not only is it an ATH, but it’s also a big figure of 19 and 3 zeros, often considered a psychological barrier.