DAX Poised for Possible Recovery – Investors Eye US Central Bank and Dollar

US Bourses Send Positive Signals

The focus of attention is the US central bank's decision on Wednesday to leave its key interest rate unchanged. Derek Halpenny, an economist at MUFG Bank, sees risks for the Fed's credibility in this. In a market analysis, he said that uncertainty about the central bank's reaction function to inflation risks makes the dollar vulnerable. Warsh, the designated Fed chair, barely explained in the press conference following the decision why the central bank was keeping its monetary policy stance stable. Halpenny, verbatim: „Die Glaubwürdigkeit der Fed wird in Frage gestellt, und nach einem starken Anstieg der Inflationserwartungen haben sich die Aussichten für den Dollar eindeutig verschlechtert.

The consequences for the currency market are immediately felt. A weaker dollar typically makes exports from the eurozone more expensive and at the same time supports the profits of European corporations that generate a large portion of their revenue in the United States. Sectors such as technology, industry and consumer goods have benefited particularly from this constellation in past quarters.

Dollar Under Pressure After Fed Decision

At the corporate level, attention is also being directed toward quarterly reports due in the coming days. Analysts expect indications of margin trends at export-heavy firms, including manufacturers from the DAX. Positive surprises in outlooks could provide an additional boost to the index.

Alongside the economic data from the United States, European inflation figures are also on the agenda for Friday. If price increases in the eurozone ease more sharply than expected, this would feed hopes for an imminent rate cut by the European Central Bank. Lower interest rates are generally seen as supportive for equities, because they raise the attractiveness of dividend-paying stocks relative to bonds.

Economic Data and Rate Outlook in the Eurozone

In the bond market, yields on eurozone government bonds were recently slightly declining. This move is in harmony with the friendly equity environment and suggests that investors are once again rotating more strongly into European stocks. The Nasdaq exchange in New York, which had served as a sentiment barometer in recent weeks, also sent a positive signal on Thursday.

Technical analysts additionally point out that the DAX tested the 19,000-point mark several times in the second half of July without sustainably breaking above it. A successful breakout above this level could, in the view of several houses, clear the path toward the all-time high. Some market participants also see a parallel in the current environment to the recovery phase following the correction in spring.

Technicals and Risks in View

Risks, however, remain. Should inflation expectations in the US continue to rise or new tensions emerge in international trade, the DAX could quickly interrupt its recovery course. The European earnings season, which kicks off next week, also carries uncertainties. Nevertheless, in the view of several observers, the positive signals currently outweigh the negatives.

Overall, much suggests that the DAX could end its fourth consecutive trading day in positive territory on Friday. Should Wall Street sustain its friendly trend and the dollar remain under pressure, a test of the record high would, from economists' perspective, be entirely realistic. Market sentiment, however, remains broadly vulnerable given the monetary policy uncertainty in the United States.

The report draws, among other things, on analyses from MUFG, Reuters and data from Deutsche Börse. It is not associated with valuations of individual stocks or investment recommendations.

The article Marktbericht: DAX könnte wieder Kurs Richtung Rekord nehmen first appeared on dpa-AFX.