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Euro Stoxx 50 index continues extended its rambunctious ascent today and is on track to end its fifth consecutive week in the greens, lifted by the overoptimistic pile up of rate cut bets from money market participants. Currently the index is gearing up to challenge the 52-week peak formed back in the last week of July and should the bullish sentiment remain intact we may see EU50 venture into territory once seen before in the final quarter of 2007, right before the start of the global financial crisis. In this report we aim to report the fundamental drivers behind the index’s rally, analyse the possible trajectory of ECB’s policy decisions and its implications going forward and finally conclude with a technical analysis.

Lofty ECB rate cut bets entice EU equity traders

Earlier today, money markets overconfidence reached a new level, as traders went forth and fully priced in a total of 150-basis points of rate cuts in 2024, overshadowing last week’s 100-bps frontrunning. The market’s rate cuts forecasts begin as early as March and are split into 6 batches of 25-basis points, namely for the months of March, April, June, July, September, October, with December probabilities currently being on the scales for another. The additional 50 basis points were predicated upon a grimmer growth outlook for the bloc going forward but also on projections that inflation will ease further and match the bank’s 2% target much sooner than originally anticipated. This very front running by the market acts as a supercharging catalyst for European stocks, as a lower interest rate environment and the signalling of easing measures, inadvertently drives bond yields lower, making credit a less ‘attractive’ option for investors and on the contrary, gives the green light for traders to indulge in allocating funds in riskier assets, such as equities.

Outlook divergence between ECB and markets could stir up volatility

The European Central Bank’s key policy rate currently hovers at the 4.5% level after 10 consecutive sessions of aggressive policy hikes and the Governing council is scheduled to convene and deliver their decision next week, the 14th of December. Unlike the market’s lofty projections, ECB policy makers retain a much more cautious stance in regards to policy decisions and inflation projections going forward and this is precisely the topic of concern for observers. The majority of ECB policymakers recognise that inflation has indeed eased faster than original estimates yet, they broadcast that the fight is not yet over, with the majority sidelining with scenarios where rates are being kept elevated at the current levels for a prolonged period of time.

These divergent views between the central bank and market participants are bound to clash and ripples of excessive volatility are expected arise, and the days of peaceful consensus of the council appear to be over. The ramping up of bets for monetary policy easing now became a global phenomenon across major central banks and the theme of policy decisions is expected to circulate around this apparent deviation of projections and the commentary of policymakers, rather than the actual decisions themselves. Thus should ECB policymakers start pushing back hard on the prospect of cuts, that may impede the trajectory of the index temporarily. Should on the other hand, the rhetoric contain this dovish undertone, with policymakers sidelining in favour of cuts, the index is expected to burst effortlessly into 2007’s high territory.

Equities Technical Analysis

EU50 Daily Chart

EUR/USD chart showing a bullish trend, indicating a rise in the value of the euro against the US dollar.

Looking at EU50 Daily chart we observe that the index bottomed out during the last week of November and since then it embarked on a 5-week winning streak, which brought it at the foothills of this years 52-week highs. The index currently has its sights on the 4480 (R1) resistance barrier and a breakout appears imminent, given the bullish momentum that supercharges the rally. We hold a bullish outlook bias for the index as we observe a plethora of bullish catalysts aiding its ascent.

First and foremost, the ascending trendline highlights the higher highs and higher lows the index has formed over the past few weeks, showcasing a clear uptrend. In addition, we note the readings of the MACD indicator below our daily chart, broadcast that the bulls are eager at driving EU50 to higher ground, as their bids maintain and gradual strengthen the bullish momentum. The RSI indicator also points out that the sentiment is definitely with the bulls given the current reading of around the 71 level, yet at the same time it screams out that a possible correction could be at bay given the overextension.

Last but not least, the bullish crossover of the 20-day EMA with the 50-day EMA on the 15th of November, alongside the divergence of the moving averages apart from each other signals the possible sustenance of the current uptrend. Should the bulls maintain control over the direction of EU50 we may see the clear break above the 4480 (R1) resistance barrier, the subsequent break of the 4530 (R2) level and should enough volume enter the picture we may see the index challenging the 4610 (R3) ceiling, which was lastly seen back in June of 2007. Should on the other hand, bears take the initiative we may see them driving the price action towards the 4420 (S1) support level initially and then closer to the 4340 (S2) support base.

Disclaimer: This material is for general informational & educational purposes only and should not be considered investment advice or an investment recommendation. T4Trade is not responsible for any data provided by third parties referenced or hyperlinked, in this communication.

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