The DAX continues its impressive upward trajectory, extending gains for the 11th consecutive session. The ongoing optimism surrounding potential interest rate cuts by the Federal Reserve (Fed) and the European Central Bank (ECB) has fueled this recovery, pushing the index closer to its July highs.

Rate Cut Expectations Drive DAX Momentum

Investor sentiment has been buoyed by expectations that the Fed will begin cutting interest rates in September. Simultaneously, the market is pricing in a 90% probability that the ECB will follow suit with another rate cut next month. The ECB was one of the first major central banks to reduce rates in June, cutting by 25 basis points.

ECB policymaker Ollie Rehn has hinted that further rate cuts might be necessary in September due to a weakening economic outlook in the Eurozone. This speculation has provided significant support for the DAX, encouraging investors to remain optimistic about continued gains.

Mixed Economic Data from Germany and Eurozone

Recent economic data from Germany and the broader Eurozone has presented a mixed picture. Last week, the German ZEW Economic Sentiment Index revealed a sharp decline, reflecting concerns about the country’s economic outlook. However, Eurozone growth remained stable at 0.3% in the second quarter, offering some reassurance.

In the latest development, German Producer Price Index (PPI) data showed that producer prices fell by 0.8% annually in July, a smaller decline than the 1.6% drop recorded in June. This deceleration in producer price deflation could be indicative of stabilizing economic conditions in Germany.

Focus on Eurozone Inflation Data

Investors are now turning their attention to Eurozone inflation data, which is expected to confirm a preliminary reading of 2.6% year-over-year in July, slightly up from 2.5% in June. Additionally, the focus will be on negotiated wage rates for Q2, as ECB President Christine Lagarde has previously emphasized that strong wage growth could be a hurdle to further rate cuts.

DAX Technical Analysis: Eyeing New Highs

From a technical standpoint, the DAX has successfully extended its recovery from the August low of 17,000, climbing above the 200-day Simple Moving Average (SMA) and the significant 18,000 mark. The Relative Strength Index (RSI) remains above 50, signaling bullish momentum and keeping buyers hopeful of further gains.

The next target for the DAX is the July high of 18,800, with potential to push towards 18,900 and fresh all-time highs if the momentum continues. On the downside, strong support is expected at 18,000. A break below this level could expose the 200 SMA at 17,600, which would be a critical point for determining the DAX’s future direction.

USD/JPY Rebounds After Two-Day Decline, Focus Shifts to Fed Speakers

The USD/JPY currency pair is showing signs of recovery after a two-day losing streak, as the U.S. Dollar steadies near its seven-month low against major peers. The recent sell-off in the Dollar has been driven by falling U.S. Treasury yields and growing expectations of a Fed rate cut in September.

Fed Chair Powell’s Speech in Focus

Investors are eagerly awaiting Fed Chair Jerome Powell’s speech at the Jackson Hole Symposium on Friday. Powell’s remarks could provide crucial insights into the Fed’s interest rate outlook. While he is expected to signal a rate cut, specifics regarding the magnitude of the cut are not anticipated.

According to the CME FedWatch Tool, the market is fully pricing in a 25-basis-point rate cut, with a 25% probability of a larger 50-basis-point cut. This marks a decrease from the 50% probability seen just a week ago, reflecting the market’s evolving expectations.

Japanese Yen Holds Steady

Meanwhile, the Japanese Yen has weakened slightly on Tuesday following a strong recovery in the previous session. The Yen’s strength has been largely driven by a softer U.S. Dollar and positive economic data from Japan, which suggests that the Bank of Japan (BOJ) may have more room to raise interest rates.

USD/JPY Technical Analysis: Key Levels to Watch

Technically, USD/JPY has rebounded from the 141.70 low but faces resistance at the 149.40 level, which coincides with the 38.2% Fibonacci retracement level and the rising trend line from early 2023. Despite the correction, the pair remains above the 146.50 level, which is the 23.6% Fibonacci retracement level.

Sellers will need to push the pair below 146.50 to extend losses towards the 141.70 August low. If buyers defend the 146.50 level, the next targets will be the 149.40 resistance level and the psychological 150 level, followed by the 151.50-152.00 zone, which includes the 200 SMA, May low, and the 50% Fibonacci retracement level.

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