European investors ended the week with a strong bullish movement. Still, European Indices saw a significant decline this morning. The market is not expecting any major announcements throughout the day. Still, investors will be readying their positions for tomorrow’s Purchasing Managers’ Indices, which is potentially why the price is declining.
The PMI is an index based on surveyed purchasing managers about economic conditions. Economists and traders have great financial insight and can significantly influence the price of both currency and equities.
DAX
The price of the DAX this morning is experiencing a strong decline as the European bell rang for the start of trading. The asset is mainly influenced by the European Central Bank’s interest rate, inflation, and earnings. European indices, including the DAX, have outperformed US competitors since October 2022. However, Goldman Sachs and JP Morgan advise that the European market has a further 3% to grow before losing momentum.
So does the DAX still have another 3% to grow? 3% is a significant movement for traders as it can take the price up to 15,963 euros.
However, the price has already shown signs of losing momentum. The price throughout February is experiencing higher volatility, but there is also plenty of downward pressure. The price has formed a major resistance point at 15,659 which has been triggered 3 times this month. Simultaneously, the price formed a support point at 15,237, pushing the price higher on 4 occasions.
Technical analysis must provide a clear signal when following indicators. This is mainly due to the need for lasting direction. Therefore, many analysts are concentrating on price action and significant price levels. So far this morning, the momentum remains in favour of bears, and a downward trend throughout the day.
The price now largely depends on tomorrow’s PMI reports, specifically the German PMI, but the French report can also have a lesser influence. A positive PMI report indicates economic growth and high consumer sentiment, which is positive for the DAX. However, gains may be dampened by the ECB reacting with a more hawkish monetary policy. Economic growth may result in prices remaining high for longer. Therefore, the central bank may be required to increase rates higher than previously expected and keep them higher for longer.
A concern for investors is the Manufacturing PMI which has remained below 50.0 for the past 6 months. It is vital that the index increases above 50.0, which will indicate economic growth. A figure above 48.0 for the manufacturing index will be positive for the Eurozone and above 51.0 for the Services PMI.
Lastly, investors will also be monitoring the German ZEW Economic Sentiment Index. The market expects the Index to rise to its highest level since February 2022.
EUR/USD
The EUR/USD declined during this morning’s Asian and European sessions as the exchange rate struggled to cross all previous resistance levels. The US Dollar Index is also slightly higher this morning as the bulls aim to achieve a price of 104.60. Investors should also note that the exchange rate will be influenced by the European and US PMI reports tomorrow.
The pricing of the EUR/USD significantly changed in February as investors started to price in a change in the Federal Reserve’s monetary policy. Traders are unsure whether the Fed will hike 25 or 50 basis points at the next FOMC meeting. However, more economists are leaning towards a 50-basis point hike. A Services and Manufacturing PMI report above 47.3 would further increase speculation of a 50-basis point hike. Last week, members of the FOMC commented on keeping interest rates higher for longer to reach their 2%.
Volatility this morning can be seen in both directions, but when looking at the longer term, we can see the instrument continues to follow a downward trend pattern. The asset has formed lower highs and lower lows over the past week. If the price fails to build momentum above 1.0722, the pattern will continue to follow a downward trend shape.
Summary:
- The German DAX starts the week with a decline, and technical analysis points to a potential slowdown.
- Investors turn their attention to tomorrow’s PMI reports which may further pressure the central banks into stronger rate hikes.
- The US Dollar Index slightly increased but experienced mixed price movement. FOMC is now expected to potentially increase 50 basis points if tomorrow’s PMI is higher than expected.
- US Investment Banks confirm they have been “long” on European equities but expect only a further 3% increase in the medium to long term.
