This article is a rewritten and expanded version of the original piece “DAX, USD/JPY Forecast – Two Trades to Watch” published by Matt Weller on Forex.com. The content below integrates the key ideas from the original article and presents a detailed analysis of the DAX index and USD/JPY currency pair, offering traders insights into possible trading opportunities in the short to medium term.
DAX Analysis: Potential Bearish Move as Momentum Slows
The DAX, Germany’s primary stock index and one of the most watched equity benchmarks in Europe, reached a new all-time high earlier in the week. This milestone was driven primarily by the widespread optimism in global equity markets, fueled by easing inflationary concerns and hope that major central banks may begin tapering interest rate hikes.
However, despite hitting historic highs, recent technical signals suggest a potential shift in momentum that could point toward a near-term correction.
Key Technical Observations on DAX:
– The index reached a record high earlier this week around 16,700 points.
– Buyers have struggled to sustain gains above this level, signaling potential exhaustion.
– A bearish outside bar emerged on the daily chart following the record high. This type of candlestick pattern, where the latest bar fully engulfs the previous one with a downward close, often signals a possible short-term reversal.
– The Relative Strength Index (RSI), a popular momentum indicator, is showing signs of bearish divergence. While prices extended upwards, the RSI failed to make a new high, implying weakening momentum behind the rally.
Short-Term Trade Set-Up for DAX:
Traders considering a short position on the DAX may find the following setup compelling, assuming confirmation from price action.
– Entry: Short near the breakdown of the bearish outside bar, ideally on a close below support at 16,500.
– Stop Loss: Above the recent high around 16,775 to limit risk.
– Target: Initial support lies near the 16,200 zone. A more extended pullback could bring the index toward its 50-day exponential moving average, currently near the 16,000 level.
Be mindful of key macroeconomic events that could influence European markets, such as Eurozone CPI releases or monetary policy comments from European Central Bank (ECB) officials. Any dovish pivot or signs of weaker economic performance could strengthen the case for a bearish position on DAX.
USD/JPY Analysis: Yields Drive Short-Term Direction
The USD/JPY currency pair remains one of the most reactive instruments to changes in interest rate expectations, particularly those surrounding the U.S. Federal Reserve and the Bank of Japan. Over the last several sessions, the pair has experienced renewed selling pressure as Treasury yields in the U.S. have declined from recent highs.
This move comes amid increasing speculation that the Fed is nearing the end of its tightening cycle and might pause rate hikes if inflation continues its downward trajectory. Conversely, expectations for any immediate monetary policy adjustments from the Bank of Japan remain subdued.
Key Drivers Behind USD/JPY Movement:
– U.S. 10-year Treasury yields have dropped from their peaks above 5% to below 4.5% in recent sessions.
– Lower yields reduce the attractiveness of the U.S. dollar relative to the yen, a currency traditionally used as a funding instrument in carry trades.
– Comments from Fed officials suggesting patience or a data-driven approach have fueled speculation that rate hikes are nearing their conclusion.
Technical Picture for USD/JPY:
From a chart analysis perspective, recent price action suggests bears may be gaining short-term control.
– The recent rejection near the 151.90 area, which marks a multi-month resistance zone, adds to the bearish case.
– USD/JPY has retreated beneath the key psychological and technical level of 150.00.
– Momentum indicators such as the RSI have turned lower and remain below overbought thresholds.
– The pair broke below an ascending trendline that had been in place for several weeks, reinforcing the likelihood of a trend reversal
Explore this further here: USD/JPY trading.