DAX 30 Consolidation Threatened as EUR/USD Strengthens
Key Talking Points:
- Vaccine hopes keep equities supported
- EUR/USD pushes to highest level since 2018 above 1.20
- DAX 30 struggles to clear key resistance as rising wedge pattern starts to form
Renewed hopes of an efficient vaccine rollout keep global equities supported for the meantime, but profit-taking and defensive hedging could be what keeps markets capped towards the end of the year. Also, a weakening US Dollar has led EUR/USD to push above 1.20 and hit its highest level since 2018, which is a detriment to those European companies heavily reliant on exports.
EUR/USD Weekly Chart
Focusing on German stocks, the trend has been upbeat since the recovery from the March lows began and the DAX 30 has been the only European stock index to reach the levels seen pre-pandemic, even before positive vaccine news broke out at the beginning of November. This is partly due to the fact that both value and growth stocks comprise the DAX and therefore the German index was able to receive some safe haven flows once the recovery got underway. Also, the German economy has always been perceived to be stronger than the rest of Europe, so capital would have felt safer being placed in the DAX than other European indices.
But this positive differentiation in the recovery stages can also be a detriment once markets stabilise, which is what we’re seeing now. Capital rotation from safer investments is likely to move to riskier assets, slightly limiting the upside potential of assets considered to be safer, which is to some extent what we can expect to see happen to the DAX compared to other European indices. This effect is expected to be less obvious than in other stock indices like the Nasdaq which are mostly made up of growth stocks, given that the German stock index also has some value stocks which are outperforming on positive vaccine news.
DAX 30 TECHNICAL ANALYSIS
The DAX 30 also managed to push higher this past week but an important horizontal resistance at 13,325 and 13,400 showed to be tough areas for buyers to crack. Upside momentum has been halted for several days now at these levels, but we can expect the German Index to continue its attempt to push higher. If so, the next area which may offer resistance is located between 13,530 and 13,600, where bullish momentum was softened in various instances back at the beginning of 2020 and before the coronavirus outbreak.
As mentioned previously, overbought conditions are now present for the DAX 30 so a short-term downside correction should not be a surprise. Short-term support can be found at the ascending trendline connecting the higher lows since the 13th of November, currently at 13,290, with the 13,000 mark as the next area for bears to target. This trendline can also be seen as a rising wedge by connecting the highs since November 9th, which would be considered a bearish sign.
DAX 30 Daily Chart
--- Written by Daniela Sabin Hathorn, Market Analyst
Follow Daniela on Twitter @HathornSabin
DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.