ECB takes dovish turn: DAX surges, FTSE awaits BoE's move

Last week’s ECB meeting was more dovish than expected. While the ECB kept its deposit rate on hold at 4% and reiterated that it was premature to talk about rate cuts, president Lagarde’s comments were dovish relative to the December meeting and her recent comments in Davos.

Spurred by gains on Wall Street and the European rates market pulling forward the pricing of a first ECB 25bp rate cut to April, and a chunky total of 140bp of rate cuts in 2024, the German stock market, the DAX, has since launched an assault on its January high.

This week, the Bank of England (BoE) takes its turn to step up to the plate. The BoE will likely keep rates on hold at 5.25% and deliver a dovish pivot by removing its tightening bias and downgrading inflation expectations.

The UK rates market has a first BoE 25bp rate cut priced for June and a total of 100bp of rate cuts priced for 2024. Confirmation of a dovish BoE pivot could be the catalyst that the FTSE has been waiting for to breakout from a stale eight-month range.

BoE official bank rate

FTSE technical analysis

For the past eight months, the FTSE has been encapsulated below horizontal resistance at 7750ish and above support at 7200.

The ability of the FTSE to close above the 200-day moving average into the end of last provides the foundation for the FTSE to set up another test of the horizontal resistance at 7750, that is also being reinforced by downtrend resistance coming from the 2023 high of 8047.

If the FTSE can see a sustained break above 7750ish, it would warrant moving from a neutral bias to a bullish bias, looking for a test of the April 7936 high, with scope to the 8047 high. Aware that while the FTSE remains below resistance at 7750ish, more range trading is likely.

FTSE daily chart

DAX technical analysis

In our last update, it was noted that given the nature of the three-wave nature decline from the 17,123 high to the recent 16,464 low, it was likely a correction, and that the DAX should push to new highs in the 17,200/400 area.

With the DAX just a stone’s throw from a fresh record high, this remains our view. However, we would be careful about chasing the market to new highs as we think that a pullback in the magnitude of 5-10% is not too far away.

DAX daily chart

• _{Source: TradingView. The figures stated are as of 30 January 2024. 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.}