European indices rebound ahead of ECB rate cut decision

Overnight, European equity markets rallied, recovering from last week's significant declines as traders positioned themselves ahead of this week's European Central Bank (ECB) meeting, where a interest rate cut is expected.

Meanwhile, the UK is bracing for a crucial week of economic data releases, including employment and gross domestic product (GDP) figures, which could further influence market sentiment.

What is expected from the ECB interest rate meeting?

Date: Thursday, 12 September at 10.45pm AEST

At its June meeting, the ECB cut interest rates by 25 basis points (bps), lowering its deposit rate to 3.75% after expressing greater confidence in easing inflation. The ECB then kept rates on hold at its meeting in July, indicating that the September meeting would be ‘live’.

For this week’s meeting, the ECB is widely expected to cut rates by another 25 bps. Slowing wage growth last quarter has eased policymakers' concerns about rising labour costs, reinforced by a sharp drop in Eurozone inflation to a three-year low of 2.2% in August. As such, the focus will be on the ECB's assessment of incoming data, updated staff projections, and future guidance.

Growth projections likely to be downgraded

Recent activity data has underperformed expectations, which should see downgrades to growth projections for the third and fourth quarters. While core inflation has been stickier than expected, the labour market has remained firm. Therefore, a slight increase in the 2024 core inflation projection is anticipated.

The Governing Council is anticipated to maintain its "data-dependent and meeting-by-meeting approach" without signalling a formal easing bias. The European rates market is pricing in a cumulative 63 bps of rate cuts from the ECB before year-end.

ECB deposit rate

FTSE technical analysis

After peaking at the mid-May high of 8474, the Financial Times Stock Exchange (FTSE) spent the better part of two months range-trading between 8300 and 8100 before it dipped to its early August 7915 low.

We remain of the view that the dip to 7915 was part of a correction within an uptrend. However, a sustained break above the 1 August high of 8405 and the late August high of 8414 is needed to confirm that the correction is complete and that a retest and break of the 8474-record high is underway before a move to 8600.

As long as the FTSE remains below the resistance level at 8405/8415, further sideways price action is possible. With the 200-day moving average of 7953 and the 7915 low of early August set to provide important support if tested.

FTSE daily chart

DAX technical analysis

In previous European indices updates, we noted that the dip to the early August low of 17,024 was part of a correction from the May high of 18,892. The subsequent rebound above channel resistance around 18,550 confirmed the correction was complete, opening the way for the DAX to break its all-time high at 18,892, which it proceeded to do.

In last week’s update here, we said: “While we can’t rule out further gains towards 19,200/400, we do feel that the current rally is mature and approaching levels from which a pullback is likely. As such, we take this opportunity to move to a more neutral stance.”

As it turns out, the DAX did turn sharply lower last week from resistance at 19,000, and we think this down move can deepen towards initial support level at 18,000 with scope to the 200-day moving average at 17,787. Please note that the DAX would need to see a sustained break above resistance at 19,000 to negate the downside risks.

DAX daily chart

• _{Source: TradingView. The figures stated are as of 10 September 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.}