European indices update: Will the FTSE follow the DAX to new all-time highs?

In our European Indices update a fortnight ago, we pondered whether the DAX and the FTSE might follow the lead of US equity markets and make fresh cycle highs.

The DAX has answered part of the question as it surged to fresh cycle highs at the end of last week. The rally followed more dovish messaging from the ECB at its interest rate meeting and a move to full data dependence for future meetings.

Euro Area core and FTSE under the spotlight

Exactly how last night's upside surprise in Euro Area core inflation (unchanged at 5.5% vs 5.4% expected) and the 15.77% rally in the price of crude oil during July fits into the ECB's more sanguine view of the world remains to be seen.

This week it's the FTSE's turn in the spotlight as the Bank of England meets on Thursday night to discuss interest rates, previewed below.

BoE interest rate meeting preview

Release date: Thursday, August 3 at 9 pm AEST

At its meeting in June, the BoE raised the bank rate by 50bps to 4.50% for its thirteenth consecutive rate increase. The decision to raise rates by a larger-than-expected 50bp was in response to another upside surprise in inflation as headline inflation in May rose by 8.7%, above consensus expectations of 8.4%.

Inflation numbers for June (released two weeks ago) finally provided a downside surprise of 7.9% YoY vs 8.2% expected. However, the labour market remains tight, and last month's wages, excluding bonuses, were 7.3% higher than a year earlier, the largest increase outside of the Covid Pandemic and above forecast for 7.1%.

A 25bp rate hike to 5.25% is fully priced for Thursday night, and there is a non-insignificant chance (30%) of a larger 50bp rate hike priced. The rates market sees the BoE's terminal rate reaching 5.75% before year-end.

Official bank rate chart

DAX technical analysis

In recent updates, we noted that the decline in the DAX from the mid-June 16,572 high to the 15,559 low unfolded in three waves, indicative of the pullback being a correction rather than a reversal lower. This view was confirmed as the DAX last week cleared interim resistance last week at 16,350/375 to test and break above the mid-June 16,572 high.

From here, the DAX is likely to be well supported on dips towards support at 16,300/250 from buyers looking for a push towards 16,800/900 in sessions ahead. Aware that only a sustained break of uptrend support at 15,750 and then recent lows at 15,650/550 would negate the positive backdrop.

DAX daily chart

FTSE technical analysis

After holding support near 7200 in early July, the FTSE has since rebounded to be eyeing downtrend resistance at 7770, coming from the 8047 high in February.

The FTSE needs a sustained break above 7770/7810 to indicate that a more robust recovery towards the year-to-date 8047 high is underway. Otherwise, a return to 7200 is possible, particularly if the Bank of England opts for a larger-than-expected 50bp rate hike this week.

FTSE daily chart

• _{TradingView: the figures stated are as of August 01, 2023. Past performance is not a reliable indicator of future performance. This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation.}