DAX, Oil Forecast: Two trades to watch 1009

DAX Cautious with Oil at $100 and Ahead of the ECB Rate Decision

The DAX, together with its European peers, has seen a quiet start to the day on Thursday, with oil prices still above $100 a barrel and global bond yields elevated. All eyes are on the central bank’s rate decision, or perhaps more interestingly, the comments from Christine Lagarde afterwards.

The ECB is expected to hike rates for a second time this year, taking the deposit rate to 2.5% from 2.25%.

Inflation in the eurozone reached 3.3% in August, with energy inflation surging 14.3%. Oil is also above $100 a barrel as a resolution to the Iran war looks far from imminent.

With the hike fully priced in, the focus will be on staff projections for growth and inflation, and on President Christine Lagarde’s press conference for insight into the ECB’s plans for further hikes. Upward revisions to inflation and growth forecasts could provide clues to additional hikes, particularly if Lagarde reiterates a meeting-by-meeting approach and data dependency.

The tone is likely to be hawkish given the upside risks to inflation, although there is still limited evidence that the energy shock is generating a widespread second-round effect.

Following this hike, the market sees the potential for two more rate hikes before Q3 next year.

A hawkish-sounding ECB and the potential for further hikes could weigh on European equities, particularly as elevated bond yields are already tightening financial conditions.

Attention will also be on U.S. PPI data, which comes ahead of tomorrow’s CPI report. Usually, PPI comes after CPI and is not as market-moving, but this time around it could move the market’s needle. These are the last major inflation prints ahead of the Fed’s rate decision next week.

Expectations are for PPI to rise 5.3%, up from 4.8% in July. Hot inflation could drive up rate hike expectations and weigh on equities.

DAX Forecast – Technical Analysis

The DAX recovery from the 21,860 March low ran into resistance at a record high of 26,620, forming a double-top reversal before moving lower and breaking below the rising trend line and 50 EMA. The price has found support at 25,500, the January high. However, the RSI below 50 keeps sellers hopeful of further downside.

Bears will look to break below 25,400 to expose the 100 EMA at 25,300 before attention turns to the 25,000 round number and the 200 EMA at 24,800. Below here, the picture would turn significantly more bearish.

Should support hold, any recovery would first need to retake the 50 EMA and the horizontal support/resistance around 25,200. A rise above here turns attention towards 26,000 and then 26,700 and fresh record highs.

Oil Remains Above $100 and Could Rise Further

Oil prices have continued to surge as hostilities between the U.S. and Iran have escalated.

Brent rallied above $100 a barrel on Wednesday, reaching a high of $103.50, while WTI booked strong gains to settle above $96.

Iran and the U.S. have launched fresh tanker attacks in the Strait of Hormuz, raising concerns over persistent supply disruption while hopes of a diplomatic solution fade.

While these risks continue and supply concerns remain elevated, oil prices could remain elevated.

Shipping across the vital Strait of Hormuz has come to a near standstill. According to Rystad Energy, recent flows have fallen below 2 million barrels a day through the vital waterway, compared with 8 to 9 million barrels prior to the resumption of the war on August 30.

Supply concerns have been further amplified by attacks from Iran-supported Houthis on Saudi energy facilities, now raising questions over supply through the Red Sea. This is particularly important because exporters have been relying on alternative routes to move oil out of the Middle East.

Therefore, further disruption to these areas could restrict supply further, potentially keeping oil above $100 a barrel.

Oil Forecast – Technical Analysis

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Oil broke out of its triangle pattern, rising above a key resistance area to a four-month high of 97.70. The price action and breakout show strong bullish momentum in the near term.

Buyers will look to extend gains towards $100 a barrel, ahead of $104, the 23.6% Fibonacci retracement of the move from the $55 low to $120 high.

Immediate support can be seen around $95, the 38.2% Fibonacci level, and $93, the July high. A break below here opens the door to $88, the 50% Fibonacci retracement level, before exposing the 200 EMA and 61.8% Fibonacci level at $80.