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DAX reaches record highs ahead of ECB rate decision

• ECB is expected to cut rates by 25 bps
• German economy contracts by -0.2% in Q4
• DAX rises to a record high on rate cut optimism

Dax is trading around an all time high as the German economy contracts and as the focus turns to the ECB interest rate decision. The central bank is expected to cut rates and give a dovish outlook helping to fuel demand for German stocks.

ECB policymakers are expected to cut rates by 25 basis points, marking the fourth straight rate reduction, in a move that has been widely telegraphed by policymakers at Davos. The region is struggling with a growth problem rather than inflation, as recent PMIs show business activity to be on the cusp of contraction and as inflation ticked modestly higher to 2.4%. Still, in the minutes of the December meeting, policymakers consider that inflation will cool to the 2% target by the middle of this year sooner than initially expected.

Meanwhile, growth remains a problem, with Germany and France the largest culprits, countries that are also experiencing political uncertainty. German Q4 GDP contracted by -0.2% QoQ, down from 0.1% in Q3 and worse than the -0.1% contraction forecast.

The ECB is expected to signal several rate cuts in 2025, although there is an element of uncertainty surrounding Trump's trade tariffs. Given that the ECB's moves have been priced in, ECB president Christine Lagarde's commentary will likely drive the market moves.

The meeting follows the Federal Reserve rate decision, in which the central bank kept rates unchanged at 4.25 to 4.5% as expected and signaled that it is in no rush to cut rates further.

In corporate news, Deutsche Bank posted a larger-than-expected fall in fourth-quarter and forward-year profits as legal provisions and restructuring costs eroded revenue gains.
 

DAX forecast – technical analysis

DAX has risen out of its rising channel dating back to August last year reaching a fresh record high. The RSI is in overbought territory so the price could consolidate or ease lower.

Buyers will look to extend towards 22,000.  Immediate support can be seen at 21,0000. A break below here opens the door to 20,500 the December high.

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GBP/USD holds steady around 1.2450 post-Fed & ahead of US data

• Fed left rates unchanged at 4.25%-4.5%
• US Q4 GDP & jobless claims data due
• GBP/USD recovery from 1.21 stalls around 1.2450

GBP/USD held steady for a second day after Chancellor Rachel Reeves’ plans for growth failed to inspire pound traders and after the Fed left rates unchanged.

The Federal Reserve left interest rates unchanged at 4.25 to 4.5%, which was in line with expectations, while Fed chair Jerome Powell said that the central bank was in no rush to cut interest rates. Strong growth, a solid labour market, and sticky inflation, combined with the uncertainty of Trump's policies, have resulted in the Fed adopting a more cautious approach to further easing of monetary policy.

The central bank is now in a holding pattern, waiting for further inflation and jobs data and more clarity on the impact of Trump's policies. Pound said it was too soon to say what Trump's policies could do to the economy and inflationary pressures.

Attention will now turn to US GDP and jobless claims figures due later today for further clarity on the health of the US economy. Q4 GDP is expected to be 2.8% annualised, down from 3.1%, while jobless claims are expected to be 220k, down from 223k.

The UK economic calendar is quiet, and attention is turning to the Bank of England interest rate decision next week. The central bank looks likely to cut rates by 25 basis points ans could signal further rate cuts to come. Since projections in November, the economy has stalled, and inflation measures dropped, although wage growth remains sticky.
 

GBP/USD forecast -technical analysis

GBP/USD recovered from the 1.21 low, with the bullish hammer candlestick reversal kicking off a recovery to 1.25 and breaking out of the rising channel.

Yesterday’s low found support on the falling trendline support, but buyers will need to rise above 1.25 to extend gains toward 1.26.

A break below 1.2385, the falling trendline support is needed to test 1.23 the April low.

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