The market consensus suggests that the ECB will likely cut interest rates at their June meeting. This decision, however, is based on economic conditions and will affect the direction of the stock market. How to trade DAX these days? We share our insights.

Will ECB cut interest rates in June?

The market is currently pricing an 80% probability for a rate cut by the European Central Bank (ECB) in the June meeting. This implies that there is a strong expectation of a 25 basis point reduction in interest rates during that meeting. Additionally, the market has priced in cumulative rate cuts of 133 basis points by the end of 2024.

There are still some important economic data, which will be released in May (e.g. PMI and CPI) and will affect the probability of the interest rate cut. In our view, the ECB may likely follow the Fed and will leave the interest rates unchanged in June. In our scenario, there could be no signs for a significant improvement in European CPI and PMI data. So, we consider scenario of stable high-interest rates for longer period. With this scenario in mind, we believe that the European stock market will move sideways.

In our opinion, we are starting to get a sideways price action trade that could lead to a sideways summer trade. Too early to determine a range with that idea, but we are going to be looking for that so we don’t fall into the traps of a summer lull.

DAX’s moves sideways until key catalysts come to the spotlight

Remember, bears can’t let price over 18050 DAX and the bulls need to defend 17900 DAX. That could be our range for the next days, so we should be aware of that potential.

So far, most European Indices posted gains: the Euro Stoxx 500 index was the strongest performer in Europe during the first quarter of 2024, rising by 12.4%. Other European indices also posted gains: the DAX rose by 10.3%, the CAC 40 increased by 8.8%. In our view, positive momentum was driven by expectations for lower interest rates and positive growth in earnings, reported by European companies for the first quarter 2024.

The issues guidance for the second quarter of the year 2024 points to a weakening growth. According toEuropean Central Bank, expectations for the second quarter economic growth in Europe in 2024 indicate that there will be a modest recovery, although forecasts have been slightly revised downward.

Furthermore, in the context of inflation in advanced economies continuing to decline, growth in Europe remains more modest compared to the United States. This subdued momentum at the start of the year reflects in the European Commission’s downgraded forecast to 0.9% for the EU and 0.8% for the Eurozone.

Cautious approach on sideway moves

Overall, the consensus among various sources points towards a cautious optimism about economic growth in Europe for the second quarter of 2024, with expectations tempered by a range of factors including inflation rates and labor market conditions. With this scenario in mind, we recommend to take cautious investment approach. We do not open large buy positions these days as we believe there could be more attractive entry points going forward.

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