Market Analysis: Euro Stoxx 50 rallies into a 23-year high

European stocks continue to ride the most recent risk-on wave. The DAX 40 has advanced 3.3% in the past week, whilst the Euro Stoxx 50 has risen over 5% to a 23-year high above 4,640 after pushing above the 2007 high of 4,595 for the first time last month. 

The ECB policy meeting on Thursday failed to offer any new guidance on when rates will start to come down, something that was already anticipated given the rise in CPI in December. But President Lagarde did mention that the disinflation is at work, suggesting that the central bank does not feel the need to tighten policy any further even if consumer prices have risen slightly. This could be seen as slightly dovish given how Lagarde has been quick to push back on any mention of rate cuts in the past, going as far as to continue suggesting rate hikes were on the table up until a few meetings ago. This seems like a point of inflexion in the ECB’s stance but that still doesn’t provide any clarity on when rates will be cut.

The slightly dovish tone enabled equities to push further higher and it allows for them to be supported in the immediate future. That said, current conditions continue to show that the rallies are becoming overextended once again. The RSI on the Euro Stoxx 50 daily chart is on the verge of pushing above 70 once again. The last time it did it allowed for two more weeks of continued bullish momentum before turning lower and correcting the short-term path. This suggests buyers could remain in control for the foreseeable future but new buyers should be aware of signs of exhaustion within the rally as a pullback should be on the cards soon. 

Euro Stoxx 50 daily chart

Past Performance is not a reliable indicator of future results.

Meanwhile, the euro has managed to recover part of Thursday’s losses. The common currency was negatively affected by Lagarde’s decision to abandon hawkish commentary at the press conference, but the momentum has turned higher on Friday against the US dollar, British pound, and Japanese yen. EUR/USD is having the most follow-through as the US dollar is weaker across the board, but the pair still faces the resistance encounter prior in the week between 1.0900 and 1.0930. The RSI remains below the 50 line but is pointing higher once again suggesting there could be some follow-through next week. Moreover, so far this week the daily candlesticks have managed to close above the 200-day SMA (1.0842) even after slipping past it throughout the sessions which shows that sellers are not in real control despite the weakness. Next week’s FOMC meeting is likely going to be a key catalyst for the US dollar, which will impact the direction of EUR/USD.

EUR/USD daily chart

Past Performance is not a reliable indicator of future results.