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DAX, EUR Update - Reflation Trade Back On After Nasdaq Meltdown, USD Attempting Comeback

DAX, EUR Update - Reflation Trade Back On After Nasdaq Meltdown, USD Attempting Comeback

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Key Talking Points:

  • Inflation concerns revive the reflation trade, evident in yesterday’s Nasdaq drop
  • DAX 30 likely to face increase selling pressure as tech stocks unwind
  • EUR/USD holding onto Friday’s gains, but USD could be gearing up for its comeback
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European and US indices intensified their selloff yesterday, with the Nasdaq dropping 2.9% and ending the session at its daily low, leading to further weakness in this morning’s trading. After Friday’s disappointing job numbers saw yields retreat, concerns about inflation seem to be back on the table and the main cause for yesterday’s selloff.

The Fed had already warned it was waiting for a few months of solid jobs data to start considering a change in the monetary policy, so Friday’s disappointing figures only played into Powell’s speech about the economic landscape still being in a tough position. Regardless, investors had already positioned themselves for a robust post-pandemic recovery, so the big miss in jobs data caused real yields to drop back again below the level seen in the 2013 “taper tantrum”, the historic low before Covid-19 happened.

But that doesn’t stop investors from worrying again about rising inflation as they expect the Fed to keep rates on hold for longer. We are likely to see CPI figures come in hot again this week but the question is whether inflation is going to be transitory, like the Fed has insisted, or will it be much more persistent. And we’re not likely to find out until the end of summer.


DAX 30 Levels

The DAX 30 is feeling the heat from the Nasdaq’s meltdown as it is the most tech-heavy index in Europe. The rotation out of safe stocks that dominated during the pandemic into cyclical stocks started back in November when a successful vaccine trial started the reflation trade. The rotation seems to be back on after a pause, which coincided with a step back in the bond market, and the DAX is likely to be the European index to suffer the most from this situation.

Looking at last week’s pullback (May 4th) the ascending trendline I had mentioned as support worked very well, confirming this area as key support going forward. For today’s session, if the DAX drops below the 50-day SMA (15,092), then 15,000 – 14,966 would be the next area to focus on for buyers to step in. If it doesn’t hold, then the path is pretty much open towards the 14,500 mark. On the upside, the 15,500 line remains a strong resistance.

DAX 30 Daily chart

Germany 40 Bearish
Data provided by
of clients are net long. of clients are net short.
Change in Longs Shorts OI
Daily 36% -9% 8%
Weekly 39% -9% 8%
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EUR/USD Levels

EUR/USD managed to take advantage of the US Dollar weakness after Friday’s job data, pushing back above 1.21 after a week of bearish pressure. But if not for Friday’s performance, the pair would likely still be struggling below the 1.21 mark as the Euro has been unable to keep its recent bullish momentum going.

Yesterday’s session saw EUR/USD bounce off the upper bound of its Bollinger Band, bringing it back in line with its recent range. So far this morning there seems to be enough support at the 1.2121 mark, a previous area of significance, to keep the par at bay, but the correction may intensify if the US Dollar manages to regain its foot. If so, a drop below 1.21 may see further selling pressure until the pair is back below 1.20, where significant support is found at 1.1980.

EUR/USD Daily Chart

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--- 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.