European equity indices: DAX set for its turn in the inflation spotlight

Last week, European equity markets finished lower for a second consecutive week. This was primarily due to the impact of hotter-than-expected UK inflation, which dashed hopes of a BoE rate cut in June.

The annual headline inflation rate in the UK eased to 2.3% year-on-year (YoY) in April, the lowest since July 2021. However, it was above market forecasts of 2.1%. Core inflation fell to 3.9% in April from 4.2% previously but above forecasts of 3.6%.

After starting last week's 50% price for a 25bp rate cut in June, the UK rates market is now pricing in just a 10% chance of a rate cut in June. The timing of the BoE's first full rate cut has been pushed back from August to November.

This week, it's the Euro Area's turn in the inflation spotlight. Ahead of the release, the European rates market is fully priced for a 25bp rate cut in June, which would see the ECB's key deposit rate lowered to 3.75%.

A follow-up ECB rate cut in July could also be on the agenda after ECB Governing member Francois Villeroy de Galhau said overnight consecutive rate cuts shouldn't be ruled out. Let's look below at what is expected.

EA inflation outlook

Date: Friday, 31 May at 7.00 pm AEST

In April, the headline annual inflation rate in the EA was stable at 2.4%, the same as in March, holding at its lowest level in three years. The annual core inflation rate, which excludes volatile items such as energy and food, fell for a ninth straight month to 2.7%, the lowest level since February 2022.

The market's preliminary expectation for this month (May) is for headline inflation to increase to 2.5% YoY from 2.4% prior. Core inflation is expected to remain stable at 2.7%. We believe these readings will not be low enough to allow back-to-back ECB rate cuts.

EA core inflation

DAX technical analysis

There is no change to our view from last week. The rally from the mid-April 17,626 low is viewed as the final leg (Wave V) of an impulsive rally from the October 2023 14,630 low. (Within Elliott Wave theory, a Wave V is usually the final leg of an impulse move before a correction unfolds.)

This Wave count is supported by the bearish divergence via the RSI indicator, which shows that new price highs have failed to be confirmed by new highs via the RSI. A sustained break below short-term support at 18,567ish from the April high would be the first indication that the rally has run its course, and a pullback has commenced.

However, before the pullback begins, the DAX has room to extend its gains into the 19,000/19,200 area.

DAX daily chart

FTSE technical analysis

After maintaining a bullish stance in the FTSE since mid-March, which caught the FTSE's blistering run higher, we moved to a more neutral bias ahead of the BoE meeting on May 9th, looking to rebuy a pullback.

Last week's hot UK inflation reading has catalysed the pullback we expected. From here, we expect dips to be well supported in the 8150/8050 area, looking for a retest and break above the recent 8474 high. Aware that a sustained break below support at 8050/8000 would signal that a deeper decline is underway.

FTSE daily chart

• _{Source: TradingView. The figures stated are as of 28 May 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.}