EUR/USD, DAX Forecast: Two trades to watch

EUR/USD rises on ECB day

• ECB is expected to cut rates by 25bps to 3.75%
• The inflation projection could be revised higher
• USD falls as Fed rate cut expectations increase
• EUR/USD looks to test 1.0915 resistance

EUR/USD is rising, recovering from losses yesterday as all eyes turn to the ECB rate decision.

European Central Bank is widely expected to cut interest rates by 25 basis points to 3.75%, down from the record 4%. This would mark the first rate cut in almost five years, but it comes against a somewhat unique backdrop for a rate cut.

The central bank is set to cut rates despite business activity expanding at the fastest pace in a year, unemployment in the region dropping to a record low, and inflation ticking higher to 2.6%.

Given the macro backdrop, the ECB is unlikely to signal the start of a series of back-to-back rate cuts. Instead, it could upwardly revise its inflation forecast for the year and potentially adopt a cautious tone, emphasizing that it's in no rush to lower borrowing costs.

The market is now pricing in just two interest rate cuts from the ECB in 2024, down from three rate cuts just a few weeks ago. This is amid signs of a recovery in the eurozone economy, which could make inflation more sticky.

Meanwhile, the US dollar is falling after yesterday's weaker-than-expected ADP payrolls, which saw the market raise Federal Reserve rate cut expectations.

The weak jobs data comes after jolts job openings fell to the lowest level since 2021, pointing to a weaker labour market ahead of Friday's nonfarm payroll report.

Other US data has also been weaker this week, including the ISM manufacturing PMI, which points to a softening U.S. economy. However, yesterday's ISM services PMI was an anomaly, coming in stronger than expected.

The market is now pricing in a 68% probability of a rate cut in September, up from 50% just last week.

EUR/USD forecast – technical analysis

EUR/USD has been climbing steadily higher, reaching a 2-month high of 1.0915 earlier this week. While EUR/USD has eased away from this high, technically, the outlook is still bullish, as EUR/USD trades above its 200 SMA, rising trendline and owing to the recent series of higher highs and higher lows.

To extend the bullish pattern, EUR/USD needs to rise above 1.0915, bringing 1.0980, the March high, into focus.

On the downside, immediate support is at 1.0850. Below here, 1.0820 is the confluence of the 100 SMA and the falling trendline. Below here, 1.0785 is where the 200 SMA comes into play. Below here, 1.0725 could offer support.

DAX rises, boosted by tech stocks & ahead of the ECB decision

• The S&P 500 hit another record high
• Nvidia jumps over 5%, taking its market cap to above $3 trillion
• ECB rate cut could help stocks to a record high

The DAX, along with its European peers, is heading higher, supported by another record close on Wall Street. This is thanks in part to a surge in Nvidia, which is lifting the tech sector in Europe.

Nvidia, the AI darling of Wall Street, topped $3 trillion in market value and leapfrogged Apple as the world's second most valuable company. This is the first computer chip company to hit the trillion-dollar market cap level. Shares rose 5.2% yesterday, and I've rallied around 147% so far this year.

Attention is now turning to the ECB rate decision. The central bank is widely expected to cut rates for the first time in almost five years. But the path beyond the initial rate cut is less certain.

A rate cut could drive equities to fresh record highs. Banks and real estate stocks will be particularly in focus.

Looking ahead to the US session, the focus will be on US jobless claims, which come after weaker-than-expected ADP payroll data and as investors bring forward Federal Reserve rate cut expectations.

Even if the ECB sounds slightly more cautious about future rate cuts, optimism that the Fed could cut rates sooner could offset the murkier path forward for ECB rate cuts.

DAX forecast – technical analysis

DAX has broken above 18634 to a weekly high as it grinds higher. Supported by the RSI above 50, buyers will look to extend gains to the 18928 and fresh all-time highs.

On the downside, immediate support is at 18634; below here, 18361, the weekly low comes into play.