Germany’s DAX index remains under pressure after hawkish messages from major central banks, and investors continue to worry that higher interest rates will harm the global economy.
The European Central Bank increased interest rates by 50 basis points last trading week and signaled more hikes to bring inflation down to sustainable levels.
This rate increase followed a similar move by the US central bank, which also hiked the benchmark interest rate by 50 basis points to the highest level since 2007 year.
Policymakers in the UK have also hiked rates by 50 bps to the highest level since 2008 year and projected interest rates would increase more than previously thought during the 2023 year.
The global economy faces a recession risk that could dent corporate earnings and stock markets, and the outlook for risk appetite in the near term is not looking good.
It is also important to note that the rise in energy prices since the Russia-Ukraine war could be a much longer-lasting shock to many European countries. Goldman Sachs reported:
We continue to expect growth to slow through the first several months of 2023 driven by the impact of the energy crisis on the German economy.
The positive news for DAX is that the German Producer Price Index rose less than anticipated in November.
Producer Price Index rose at an annual pace of 28.2%, easing from the previous 34.5%, while Germany’s IFO Business Climate survey showed a third consecutive monthly improvement in business morale during December.
Despite this, the upside potential for Germany’s DAX index remains limited, and the near-term fate of the country’s economy will depend on how to offset the headwinds of geopolitical uncertainty and the high cost of living.
Technical analysis
Germany’s DAX index weakened again below 14,000 points after hawkish messages from major central banks.
On the chart below, we can also see that the price has moved again below the 10-day moving average, which indicates that we can see a further decline in the weeks ahead.
Data source: tradingview.com
DAX is currently down by 13% for the year to date, and the upside potential for this index remains limited.
If the price falls below 13,500 points, the next target could be 13,000 points which represents a strong support level. On the other hand, if the price jumps above 14,300 points, the next target could be resistance at 14,500.
Summary
Germany’s DAX index remains under pressure after hawkish messages from major central banks, and for now, the upside potential for this index remains limited. If the price falls below 13,500 points, the next target could be 13,000 points which represents a strong support level.
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