DAX hits record as dovish ECB sinks euro
Fawad Razaqzada October 26, 2017 4:59 PM
The European Central Bank successfully managed to announce tapering of its QE stimulus programme without causing the euro to rise or panic in the stock markets.
The European Central Bank successfully managed to announce tapering of its QE stimulus programme without causing the euro to rise or panic in the stock markets. In fact, the euro has taken a big drop today, falling below $1.1700 after trading as high as $1.1238 earlier in the day. This goes to show how effective the ECB’s communication strategy has become. Granted, the euro has been rising throughout the year, so today’s sell-off can be considered a case of “buy the rumour, sell the news” type of a reaction. Nevertheless, the euro’s earlier rise was a direct result of the ECB signalling to the market what was about to happen later on in the year, which has now come to pass. Well done ECB. Now that QE has been reduced in half and simultaneously extended in duration (again), the ECB has effectively maintained the same level of monetary stimulus as before. If anything, the central bank’s desire to keep interest rates at current low levels for an extended period of time, and well past the horizon of the bank’s net asset purchases, is quite dovish. This is good news for the stock markets in the Eurozone. Indeed, after going nowhere all week, the German DAX index has finally broken out of its tight range to climb to a new record high today. The simultaneous sell-off of the euro has also helped to boost the appeal of European export names further.
As we mentioned before, the DAX had already broken to a new record high earlier this month before the rally stalled. Other European indices are lagging behind in that they haven’t been able to climb to new unchartered territories yet. Now that the rally has evidently resumed again and with the DAX already outperforming, we remain bullish on the German index the most as it will likely continue outperforming her European peers.
Technically, the index’s recent consolidation above the old all-time high was indeed bullish as there was no immediate rejection. Now that there has been acceptance at these levels and with the DAX forming a base, and moving higher, the path of least resistance remains to the upside. That will only change if key support at 12900 breaks down now. One of our favourite ways to look for bullish objectives at record highs would be by using the Fibonacci extension tool. As per the chart, the main bullish objective remains at 13245 area, which corresponds with the 127.2% extension of the previous downswing. There are additional Fibonacci extension levels below this level derived from the most recent shorter-term downward move, at 13145 and 13208.
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