GER30 Rises after the ECB’s Peak Rates Hint

GER30 Analysis

The European Central Bank increased rates by 0.25% on Thursday ^[1], in the tenth consecutive hike since the July 2022 lift-off that has resulted in 450 basis points worth of tightening. Although policymakers had opened the door to a pause, the inflation outlook did not leave them much option. They raised their 2023 and 2024 forecasts, to 5.6% and 3.2% respectively.

The ECB is in a bind as inflation is moderating, but is still elevated and is "expected to remain too high for too long". On the other hand, the economy is struggling and even more so Germany, which has not posted growth since Q3 2022 and this creates apprehension around more tightening. The central bank lowered its Euro Area GDP projections, to 0.7% for this year and 1% for the next.

As such, there was a dovish tone to the decision, since the ECB hinted at peak rates. It said that if the current levels are maintained for "a sufficiently long duration", will make a "substantial contribution" to the "timely return" of inflation to the 2% target. President Lagarde was vague when asked during her press conference, but kept the door open to more hikes, saying that "we can't say that now we are at that peak". ^[1]

GER30 reacted positively to the dovish hike and extends its advance today, trying again to take out the 50% Fibonacci of last month's drop. Successful clearance of this level, would allow it to look again towards the record highs (16,535), but we are cautious at this stage.

The ECB may have a hard time staying on the sidelines given high inflation and Germany's economic hardships can continue to weigh. Markets also digest the EU-China EV conflict, which could help the important German auto industry, but also creates risks. The Relative Strength Index (RSI) moves to overbought territory and a pullback towards the 200Days EMA (15,470-60) would not be surprising, although sustained weakness past that has a high degree of difficulty.