DAX's historic gains amid eurozone's inflation easing

Last week marked a historic fifth consecutive gain for the DAX, echoing patterns not seen since October 2022.

The DAX’s gains last week were supported by a Eurozone inflation report, which showed inflation eased to 2.4% in November, its lowest level since July 2021. Core inflation fell to 3.6% in November from 4.2% in October. With disinflation in Europe playing out much like in the US, it's no surprise that the European interest rate curve is pricing in five 25bp ECB rate cuts by the end of 2024.

The UK rates market isn’t quite as excited about BoE rate cuts. Although headline inflation has fallen from 10.7% to 4.6% last month, core inflation at 5.7% is still too high. This explains why the UK rates market is pricing in just two and a half BoE rate cuts in 2024.

The contrasting inflation and interest rate outlook between the Eurozone and the UK helps to explain why the DAX gained 9.41% in November while the FTSE gained only 1.8% during the same time.

FTSE technical analysis

While the FTSE did gain last week, it remains encapsulated in a range above horizontal support at 7200, and below downtrend resistance at 7610ish (from the February 8047 high) as well as the 200-day moving average at 7582.

If the FTSE can see a sustained break above the resistance layers at 7582/7610ish, it would set up a retest of the September 7746 high, which, if it breaks, would open up a test of the April 7936 high.

Aware that until this occurs, further range trading is likely, including a possible retest of range lows at 7200.

FTSE daily chart

DAX technical analysis

Like its US counterpart, the S&P 500, the DAX has gotten very close, but thus far, failed to break above its year-to-date highs.

As viewed on the RSI, the DAX is at extremely overbought levels, and while we remain bullish into year-end, we would not contemplate opening fresh longs at these levels. Instead, we would prefer to use dips back towards support at 16,100/16,000, looking for the DAX to retest and break above the 16,615 July high in the weeks ahead.

Aware that a sustained break below the support of the 200-day moving average at 15782 would warn that the rally has run its course and that a deeper pullback is underway.

DAX daily chart

• _{Source Tradingview. The figures stated are as of 5 December 2023. Past performance is not a reliable indicator of future performance. This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation.}