Dax defends annual profits – ECB decision moves the euro exchange rate

Dusseldorf An extremely lackluster week on the German stock market is coming to an end. The leading index Dax continued its sideways trend on Friday and was almost unchanged at 15,115 points in the last hour of trading.

In the trading week now ending, the Dax rose to 15,186 points and fell to 14,970 points. Such a small trading range of just over 200 points is very unusual on a weekly basis. This shows that investors are holding back and are looking for new orientation.

Monetary policy should provide this. The interest rate decision by the US Federal Reserve is due on Wednesday, and next Thursday the European Central Bank (ECB) will decide on the interest rate level in the euro area. It is considered agreed that the euro monetary authorities will raise interest rates by a further 50 basis points.

The ECB has hiked interest rates four times since last summer. The key interest rate in the euro area is currently 2.5 percent, and the interest rate that banks receive for excess capital parked at the central bank is two percent.

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The decision itself is unlikely to affect prices on the capital markets – the statements made in the run-up to the meeting were too clear. Rather, the focus is on the signals that the ECB is providing for the subsequent interest rate decisions.

Central bank chief Christine Lagarde, so far unimpressed by all the speculation, has emphasized her words from December: interest rates would have to rise steadily and significantly in order to combat the persistently high inflation. “We expect hawkish statements from Lagarde,” explain the analysts at major bank ING. Supporters of a tight monetary policy are referred to as hawks.

>> Read here: Top Economist El-Erian – Inflation will fall “to around four percent” in the coming months

According to a Bloomberg survey, after the 50-point move in February, economists expect another increase of this magnitude in March and a hike of 25 basis points in May. Then, according to their forecast, interest rates will remain at this level for about a year.

In the markets, on the other hand, the words of the deaf, that is, those of the advocates of a softer strategy, are currently being given a special hearing. However, these statements are completely contrary to the statements made by the currency watchdogs – which in turn is a bad sign for the credibility of monetary policy. The discrepancy in expectations could cause significant movements on the markets in the new stock market week.

Monetary policy pointing the way for the euro exchange rate

The speculation about the pace of the interest rate hike cycle is particularly relevant to the euro exchange rate. The common currency reached its highest level in nine months at times on Thursday at $1.0929 per euro. As of Friday afternoon, the rate is $1.0844. The fact that Lagarde and some of her colleagues oppose the doves so vehemently has recently supported the value of the common currency.

At the same time, the euro is benefiting from speculation about a slower pace in the USA. The process of raising interest rates began there in May, followed by five further steps to a range of 4.25 to 4.5 percent. The markets are already speculating about the timing of the Fed’s first interest rate cuts.

It is true that a specific comparison of interest rate levels only makes sense to a limited extent – ​​the US economy has a completely different structure, and interest rates there before the zero-interest phase were significantly higher than in the euro area. But the move would have an important symbolic effect.

Added to this is the reduced fear of a recession in Europe. In other words, the probability has increased that the recession might not even come up at all. Economic indicators such as the most recently published Purchasing Managers’ Index or the most recent Ifo index at least give us hope.

>> Read here: The unusual consonance between Dax and Euro

That would in turn result in higher inflation risks, according to the experts at Commerzbank. Conversely, it could mean that the ECB has to continue its rate hike process longer than currently signaled and expected by the market. “Accordingly, this would be a positive factor for the euro,” say the analysts.

The factors mentioned influence the foreign exchange market over a longer period of time. In this respect, a large part of the development should already be priced into the current price level. With a view to the forthcoming central bank decisions, the Commerzbank experts nevertheless see a chance that the euro will continue to rise.

What the chart technique says

From a technical point of view, the signs remain unchanged: the upward trend is intact, and the Dax has various breakpoints around 15,000 points and just below.

The leading index is also well above all relevant average lines. The 38-day line for the short-term trend is also far away at 14,480 points. If the leading index rises above the historical high since the beginning of January, i.e. above 15,270 points, the conditions are good for further upward steps to follow.

Look at individual values

Adidas: Adidas shares rose 2.2 percent after the analysis house Warburg Research upgraded them from “hold” to “buy”.

Airbus: With a price loss of 3.5 percent, the share certificates were among the weakest Dax values. Analyst firm Jefferies downgraded the shares from “buy” to “hold”.

Sartorious: After the previous day’s gains, investors take profits. The titles of the laboratory outfitter fall by more than three percent to 419 euros. Sartorius shares climbed to EUR 441.50 on Thursday.

Schaeffler: Analysts at Deutsche Bank have resumed their coverage of the supplier. They recommend buying the share and set the price target at eight euros. The titles rose on Friday by 2.3 percent to 6.60 euros.

Heidelberg printing machines: The papers are at the top of the SDax with an increase of up to 13.4 percent to 1.88 euros and are more expensive than they have been since June 2022. According to a trader, positive analyst comment provided a boost.

More: Which stocks benefit from falling inflation.

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