May 10, 2023

The GER 30 index found support late last week and will look for one final push to overhead resistance.

GER 30 – Weekly Chart

GER 30 – Weekly Chart

GER 30 trades at 15,945, with resistance at the 16,300-355 levels. 

The recent price action hints that European stocks could make a final push to the highs of 2021, which would determine the next big trend. European indices started the trading week higher, with the UK markets closed for the King’s coronation. 

France’s CAC 40 and the Italian FTSE MIB closed higher on Monday, while the German DAX ended the day’s trading unchanged. 

Over the last few weeks, investors have been concerned with stubborn inflation, higher interest rates, and banking turmoil. 

The US Federal Reserve and the ECB hiked rates again by 25 bps despite fears that higher rates had caused banking problems. Many expect the central banks to start cutting rates in the summer. However, the Bank of England is scheduled to meet this Thursday and will undoubtedly raise rates due to higher inflation. 

European stocks were also boosted by news that the Italian Treasury was set to reduce its holding in Banca Monte Dei Paschi, which had troubles over the last few years.

European Central Bank officials supported President Christine Lagarde’s statement that there’s some way to go before interest rates peak. Traders had reduced bets in the run-up to Thursday’s policy meeting on concern that US banking turmoil would spread to Europe. But Lagarde sees at least another two rate hikes. 

“Rates must be raised as long as we can be reasonably sure that price increases will be slowing steadily to close to 2 per cent over a reasonable period of time,” ECB governing council member Madis Muller said in a blog post.  

“In light of what we know now, this means that yesterday’s rate-hike decision will not be the last.” 

Lagarde had said that the ECB’s latest decision received “almost unanimous support”, even though some officials preferred a more prominent, half-point move. 

Economists at Goldman Sachs and Morgan Stanley are following Ms Lagarde and now predict two more hikes. ING and Commerzbank are among those expecting only one. 

“We have slowed down not because our determination to beat inflation has diminished,” said ECB member Villeroy de Galhau.  

“We are committed to bringing inflation toward 2% by 2025 and maybe even by the end of 2024.” 

Economists surveyed by the ECB have lowered their outlook for this year and next. At the same time, they see inflation at 2.2% in 2025 and 2.1% over the longer term. The ECB’s projections have inflation at its 2% target in the second half of 2025. 

With these projections priced into the market, the GER 30 index could make a move in the next week or two for the 2021 highs. Tomorrow will see a final inflation reading for the German economy for April, and 7.2% is expected. A lower number could propel European stocks higher. A slumping US dollar has also helped the demand for European stocks.

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