DAX, FTSE 100 Forecast: Two trades to watch

DAX rises ahead of the ECB rate decision

• ECB is expected to cut rates by 25 bps
• Growth & inflation projections will be in focus
• A dovish ECB could help the DAX back up to record highs

The DAX is rising ahead of the ECB interest rate decision later today, where the central bank is widely expected to resume its rate-cutting cycle. With inflation down at a 3-year low of 2.2% and signs of growth slowing, the ECB is expected to cut rates by 25 basis points, taking the rate to 3.5%. This comes after the ECB started its rate-cutting cycle in June with a 25 basis point rate cut.

Given that the rate cut is widely expected attention will be on new staff projections and forward guidance.

Recent data has been weaker than expected, so we could see a downward revision to growth projections in Q3 and Q4. Meanwhile, core inflation has been slightly stickier than expected, so core inflation projections could be revised modestly higher.

The ECB will likely maintain its data-dependent, meeting-by-meeting approach rather than guiding for a formal rate-cutting timetable.

The market is pricing in two rate cuts before the end of the year: 1 in September and another likely in December. A slightly dovish-sounding ECB could help lift the DAX back up toward all-time highs. However, sentiment could struggle if the central bank focuses on the risk to growth.

DAX forecast – technical analysis

The DAX recovered from its August 5 low of 17000, rebounding to resistance and an all-time high of just shy of 19000.

The correction lower from the ATH has found support at 18,200 and pushed higher. With the price above the 50 SMA, buyers will look to rise above the 20 SMA to extend gains towards 19000 and fresh record highs.

Failure to rise above the 20 SMA could see sellers retest the 18,200 level before opening the door to 18000. A break below here exposes the 200 SMA at 17860 and potentially deeper declines.

FTSE 100 rebounds as risk sentiment improves

• Mines lead the FTSE to a weekly high
• Housebuilders rise after RICS house index shows house price growth
• FTSE 100 remains in a holding pattern

The FFTSE 100 has opened over 1% higher, snapping a 2-day losing streak as risk appetite improves following US inflation data.

US inflation was mixed, with headline inflation below estimates and core inflation unexpectedly rising. The data calmed concerns over recession in the US but also saw the market lower expectations of a 50 basis point rate cut next week.

The FTSE has risen to a weekly high amid strength in miners and after data showed a rise in house prices.

Housebuilders are in favour after the latest Royal Institute of Chartered Surveyors (RRICS) house price survey, which showed house prices rising for the first time since 2022.

The UK housing market is showing signs of recovery moving into the final quarters of the year. The improving outlook for the housing market comes as lenders cut their mortgage rates following the Bank of England interest rate reduction to 5% at the start of August, the first rate cut since 2024.

The market is pricing in a second rate cut from the Bank of England in November, which could help mortgages become more affordable and, therefore, further aid the recovery of demand and the housing market.

Looking ahead, the UK comic calendar is quiet. US PPI inflation and jobless claims will be in focus. While other US jobs data have shown signs of weakness, jobless claims have remained a source of calm for the markets.

FTSE 100 forecast - technical analysis

The FTSE 100 trades above its multi-month rising trendline and 200 SMA in a long-term bullish trend. Having reached a record high of 8480 in May, the price has been in a holding pattern capped on the upside by 8400 and 8150 on the downside. The RSI is neutral, giving away few clues.

The long lower wick on yesterday’s candle suggests there was little selling interest at the lower levels. Buyers have risen above the 50 SMA and will look to rise towards 8400. A breakout above here brings 8480, the all-time high, back into focus.

Sellers will look for a break below the 8150 level, which is also the rising trendline support. Below here, 8000 comes into play.