The indeX files

DAX

DAX bulls have had a time recently as price continues to see-saw near recent highs. The main driver of price action has been the steady decline of both German and eurozone economic indicators over recent months. The German economy, which traditionally has been the export engine of the eurozone, has slowed dramatically this year. The weakness in the German economy was made clear earlier in the month as Factory orders for May racked up an 8.6% year-on year decline, the biggest in nearly a decade. A large part of Germany’s issues have been focused around slowing automobile exports, with the sector taking a large hit this year. With this in mind, Trump’s postponed threat of a fresh tariff on eurozone automobile exports would be a heavy blow to the already frail German economy.

Despite the slowdown in both German and eurozone growth over recent months, the DAX has been supported by growing expectations of ECB easing. Despite initial expectations earlier in the year that the ECB would raise rates over summer, the tone of the central bank’s guidance has shifted dramatically, and traders are now weighing up the odds of a rate cut. Despite the market looking for fresh easing at its latest meeting, the ECB disappointed traders by keeping policy unchanged. However, the bank did signal that a rate cut would likely be necessary over the coming months and said that staff were discussing using alternative measures.

Technical Perspective

After breaking out above the prior 2019 highs of 12452.4 to trade fresh highs of 12658.1, momentum has stagnated in the DAX. Price has settled into a sideways range between support at 12174.4 and resistance at the 12658.1 level. The current consolidation at highs is moving within the parameters of a contracting triangle pattern, reflecting the loss of momentum. If we break to the topside, the next level to watch will be 12818 while to the downside, the 11840.7 level is the next key support to monitor.

FTSE

Its been another bumper week for FTSE bulls as the index continues to soar to fresh highs. Despite ongoing Brexit uncertainty, which is clouding the outlook for the UK economy, the index has been well supported by expectations of BOE easing. The appointment of Boris Johnson as the new head of the Conservative party and, consequently, the new Prime Minister, has increased the chances of a no deal Brexit. Johnson has vowed to take the UK out of the EU by the current October 31st deadline, with or without a deal. Given the heavy differences which remain over the Irish backstop issue, the market fears that the UK is now more likely leave without securing terms. In turn, this would likely weigh heavily on the UK economy for FTSE traders however, the uncertainty has provided ongoing impetus for buying, as the BOE has highlighted that it could be forced to cut rates in such a scenario – casusing a further decline in GBP and pushing the FTSE higher.

Technical Perspective

The FTSE continues to trade higher, within the bullish channel which has framed price action over the year so far. Price has now broken above the prior 7622.6 highs to trade fresh 2019 highs just short of the next structural resistance at the 7788.5 level. In that region we also have the bull channel top, offering confluent resistance. While above the 7622.6 level, focus remains on a further push higher. However, I will be monitoring price action around those levels for any sign of a potential correction lower. Should we see any move lower in the short term, the levels to watch will be around the 7368.3 level where we have the next structural support.