German equity benchmark, the DAX index, which recently received ten new companies, seems to be struggling ahead of the critical ECB meeting. At the time of writing, the index was down 1% and was seen trading near 15,670 EUR, below its 50-day moving average. In addition, volatility is picking up, usually leading to a decline in risk assets, such as equities.
ECB decision in focus
As always, several policymakers at the ECB board are hawkish, and the rest is dovish. On Wednesday, the European Central Bank policymaker Robert Holzmann said that the ECB might normalize monetary policy sooner than market participants expect . A hawkish example.
On the other hand, the ECB governing council member Bostjan Vasle noted that the Euro area still needs a ‘highly accommodative monetary policy. “New waves of a pandemic may slow recovery,” he warned—a dovish example.
Therefore, it isn’t easy to make an official expectation of what should happen at Thursday’s ECB meeting. Nevertheless, analysts expect the ECB to taper its bond purchases slightly, possibly supporting the EUR/USD pair and undermining the DAX index.
said analysts at Nordea, in a note.
That is because inflation in the euro bloc is way above the ECB 2% target and shows no signs of slowing, putting pressure on the central bank to tighten monetary policy. On the other hand, we all know how the ECB could not raise rates between 2017-2019 when the economic situation in the eurozone was much better.
Still, monetary policy will remain highly loose, and investors should buy short-term dips in stocks.
DAX falls below 50-day average, looking bearish
The technical analysis is starting to point to a more significant correction. The index is now trading below the 50-day moving average (currently near 15,700 EUR), suggesting further weakness might be ahead of us until DAX reclaims the average.
It is now testing previous lows at 15,640 EUR, and if this support is broken to the downside, stop-losses of long positions will be hit, most likely sending the German benchmark toward 15,430 EUR. Another bearish sign was the inability to breach the psychological 16,000 EUR resistance, which led to some profit-taking after the recent rally.
Alternatively, if DAX reclaims the 50-day average, we could see a rally toward 15,800 EUR. But for the time being, the essential resistance stands at 16,000 EUR, and the index needs to make a daily close above it to confirm the long-term uptrend.