European equity indices: ECB to deliver cautious rate cut amid inflation surprise

Last week, the DAX and the FTSE finished lower for a third consecutive week, jolted by an upside surprise in Euro area inflation and falls on Wall Street.

The annual headline inflation rate in the Euro area increased to 2.6% year-on-year (YoY) in May from 2.4%, its first rise in five months. The core inflation rate increased to 2.9% YoY in May from 2.7% in April, higher than the market consensus of 2.8%. The rises were most pronounced in Germany, France, Spain, and Italy.

Previous ECB forecasts

The ECB previously forecasted an average core inflation rate of 2.5% YoY for the second quarter of 2024. Last week's inflation surprise came just days before this week's ECB meeting, and less than two weeks after UK inflation surprised to the upside.

While the fallout from last week is not expected to alter the course of this week's ECB meeting, for fear of sending the wrong message about inflation, it does cloud the path of future ECB rate cuts.

Aside from the ECB meeting, the focus will be on Germany, with key releases including factory orders, industrial production, and the trade balance as concerns of slowdown in the US begin to mount.

ECB interest rate meeting

Date: Thursday, 6 June at 10.15pm AEST

At its meeting in April, the ECB left rates unchanged for a fifth consecutive meeting and acknowledged that inflation was on the right path to return to target, thereby opening the door for a 25bp rate cut at this week's meeting.

With a 25bp rate cut almost guaranteed, the focus will be on any upcoming guidance from the statement, and press conference to offer clues on the pace of future rate cuts.

Fresh economic projections will reveal growth and inflation forecasts revised marginally higher, offset by comments from President Lagarde, that the disinflation process is on track. The ECB President will also reiterate that future decisions are data-dependent and will be made on a meeting-by-meeting basis.

With little new information to gain before the July meeting, the rates market is pricing in a 50% chance of the next rate cut being in September, with rate cuts totalling 60bp before year-end.

ECB deposit rate chart

DAX technical analysis

There is no change to our view. 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. As stated 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 highs in price have failed to be confirmed by new highs via the RSI. A sustained break below short-term support at 18,600/400ish 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 9 May, looking to rebuy a pullback.

After a six-day losing streak following hotter-than-expected UK CPI, the FTSE ran into buyers and bounced from the 8150/8050 area we highlighted in last week's update. While we aren't convinced since we have seen the lows in this pullback, we will remain with a positive bias, proving the FTSE remains above support at 8050/8000.

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 4 June 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.}