As the DAX kicks off 2023 on a positive note, investors are optimistic about the index’s potential to reach all-time highs in the coming months. The Eurozone and Germany are experiencing receding inflation rates, which have provided a tailwind for the index. Additionally, favorable weather conditions and high gas storage levels in Germany and across Europe are signaling a reduced risk of an energy crisis in the region. These factors combined could propel the DAX to new heights in the near future.
Inflation Trends in Germany and the Eurozone
The recently released inflation data for Germany and the Eurozone have aligned with expectations, indicating a continued downtrend in inflation. Gas prices in Europe have also dropped below 100 euros, contributing to the likelihood of inflation remaining low in the upcoming months. At 60 euros per MWh, gas prices are currently lower than they were during Russia’s invasion of Ukraine, further supporting the downward trend in inflation.
The German government’s efforts to diversify energy sources and expand LNG terminals have bolstered confidence in the country’s ability to navigate through the winter season without facing severe energy shortages. However, reliance on gas imports from Russia, particularly through the Yamal pipeline, remains a point of concern. Despite reduced imports, the flow of gas from Russia to Germany could still be leveraged by the Russian side, especially amidst ongoing geopolitical tensions.
ECB’s Monetary Policy Impact
The European Central Bank’s (ECB) monetary policy decisions play a significant role in shaping European financial markets. Following a recent meeting where the ECB adopted a more hawkish stance on interest rate hikes, investors are anticipating further tightening measures. Continued inflation above target levels could prompt sustained monetary policy tightening by the ECB, potentially impacting the current bullish trend on the DAX index. Any abrupt changes in the ECB’s narrative in the upcoming meeting could undermine the bank’s credibility and market sentiment.
DAX Performance and Outlook
Despite a correction in December, the German DAX has been on an upward trajectory since the beginning of the year, aiming to surpass the psychological barrier of 15,000 points. The index’s target remains the all-time high above 16,000 points, but a local correction may be on the horizon due to the rapid ascent. In the event of a pullback, the region around 14,700 points is expected to provide support, with 14,000 points serving as a key psychological level to watch.
The upcoming ECB meeting on February 2, following the Fed’s decision, will be crucial in determining the market’s direction. Investors should stay vigilant and monitor any developments that could impact the DAX’s performance in the coming weeks.
Disclaimer: The author does not own any of the securities mentioned in this article.