DAX, USD/JPY Forecast: Two trades to watch

Fiona Cincotta
By :  ,  Senior Market Analyst

DAX falls ahead of the ECB rate decision

  • DAX tracks Wall Street lower, after Nasdaq dropped 2.4%
  • ECB is expected to leave rates unchanged at 4%
  • DAX heads towards 14625, the October low

The DAX points to a weaker start, tracking losses on Wall Street overnight after rising treasury yields and disappointing numbers from Alphabet saw the Nasdaq close 2.4% lower.

Today, attention is turning to the ECB rate decision, where the central bank is expected to leave interest rates unchanged at a record 4% after ten straight rate hikes.

Since the previous meeting, inflation has continued to cool. However, the economy is also showing signs of weakening, and the region is in danger of tipping into recession in the second half of this year. This week, PMI data showed another deep contraction in the eurozone business activity, falling to a 3-year low.

While policymakers in recent speeches have signaled that interest rates will likely remain on hold in the October meeting, they have also suggested that rates will remain high for longer to pull inflation back towards the ECB's 2% target. The market currently expects the ECB to cut interest rates in the third quarter of next year. However, there are also concerns that the conflict in the Middle East could add to inflationary pressures.

A hawkish-sounding ECB or a central bank that is increasingly concerned about the economic outlook for the euro area could pull stocks lower.

In addition to the ECB, which will take centre stage, corporate earnings will also be in focus, with numbers from Mercedes-Benz group and Volkswagen among the big names reporting.

In the US session, GDP data will be in focus. Stronger-than-expected US growth will not only highlight the resilience of the US economy compared to the weakness in Europe but could also fuel bets of a December rate hike from the Fed, which could drag stocks lower.

DAX forecast – technical analysis

After failing to rise above the 14945 resistance, the DAX rebounded lower, and is heading towards support at 14625, the October low. The RSI supports further downside. A break below 14625 brings 14450, the 2023 low into target. Any recovery would need to retake 14945/15000, to negate the near-term downtrend.

dax forecast chart

USD/JPY rises above 150 ahead of US Q3 GDP

  • Yen is on intervention watch after breaching 150.00
  • US Q3 GDP is expected annualized at +4.3% up from 2.1%
  • USD /JPY has pushed above the critical 150 level, putting the yen on intervention watch.

The US dollar has risen to a one-week high against a basket of currencies as it tracks treasury yields northwards and as demand for riskier currencies eases.

At 150 the yen is vulnerable to the threat of an intervention by Japanese authorities, and the breach of this level hasn't gone unnoticed. Japanese finance minister Suzuki warned investors against selling the yen and added that authorities were watching moves in the FX closely.

However, if Japanese authorities let 150.00 pass, then USDJPY could rise rapidly. The psychological threat of intervention has acted as a strong resistance. If that is removed, USDJPY has the potential to rise strongly.

The USD has been on a tear after stronger-than-expected PMI data at the start of this week, which highlighted the strength and resilience of the US economy and fueled bets that the Fed would need to keep interest rates higher for longer.

Attention is now on US GDP data, which could be a key risk event for USD/JPY. Expectations are for The US economy to grow 4.3% annualized in Q3, up from 2.1% in Q2. Strong growth would add to evidence that the Federal Reserve may need to hike interest rates again in December.

Currently, the market is pricing in a 97% probability of the Fed leaving rates unchanged next week and a 30% probability of a rate hike in December. The data comes ahead of tomorrow's core PCE figures.

USD/JPY forecast – technical analysis

USD/JPY has extended gains above 150.00 and is testing resistance at 150.50. The RSI supports further upside while it remains out of overbought territory.

Buyers will look for a meaningful rise above 1.50.50 to bring 151.00 into target, ahead of 151.80 the rising trendline support.

On the flip side, a slide below 150.00 could test support at 149.50 the 20 sma, ahead of 148.75, last week’s low. However, if the yen strengthens owing to an intervention, the pair could slide significantly towards 147.30, the October low.

usd/jpy forecast chart

 

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