FTSE and DAX near records amid earnings and rate cut hopes

After a record-breaking rally, fuelled by strong corporate earnings, rising commodities and expectations of rate cuts, the FTSE and the DAX spent last week consolidating near record highs. While sticky inflation is expected to see the Federal Reserve keep rates higher for longer, underlying inflation in the UK and in Europe has made good progress towards target.

In response, the ECB and the BoE have sounded more dovish. The expectation is that they will cut rates once or perhaps twice before the Federal Reserve starts its rate-cutting cycle in September. Whether the BoE is able to cut rates at its next meeting on 20 June, will depend to a large degree on this week's inflation report for April, which is previewed below.

UK inflation data preview

Date: Wednesday, 22 May at 4.00pm AEST

In March, the headline annual inflation rate in the UK fell to 3.2% YoY from 3.4% prior, its lowest rate since September 2021. The annual core inflation rate, which excludes volatile items such as energy and food, dropped to 4.2%, the lowest since December 2021.

Inflation's steady progress toward the BoE's target has significantly contributed to the bank's dovish tilt. The rates market is now 50% priced for a 25 basis points (bp) BoE rate cut in June, with a full 25bp rate cut expected by August. The market's preliminary expectation for this month (April) is for headline inflation to ease to 2.3% YoY and for core inflation to fall to 3.6%. If correct, this should increase the chances of a 25bp BoE rate cut in June.

UK CPI data

DAX technical analysis

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 bearish divergence in the RSI indicator, showing that new price highs are not confirmed by new RSI highs. A break below short-term support at 18,567, stemming from the April high, would indicate that the rally has run its course and a pullback has commenced.

However, before the pullback begins, the DAX may yet extend its gains into the 19,000/19,200 area.

DAX daily chart

FTSE technical analysis

Since mid-March, we maintained a bullish stance on the FTSE, capturing its blistering run higher. However, we shifted to a more neutral bias ahead of the BoE meeting on May 9th, anticipating a pullback to rebuy.

Although a pullback has yet to develop, the FTSE's overbought readings via the RSI indicator suggest a pullback may not be far away.

FTSE daily chart

• ^{Source: Tradingview. The figures stated are as of 21 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.}