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DAX Index Faces Headwinds on China’s Growth Worries and German Inflation Data

The DAX index has experienced a downward trend for the past three consecutive days and six out of the last seven sessions. Alongside other European equities, the DAX is being affected by mounting concerns regarding the economic recovery in China and increasing fears of a recession in the United States.

In May, Chinese manufacturing PMI dropped more than anticipated, hitting a five-month low of 48.8. This decline from April’s 49.2 suggests that China’s post-pandemic recovery is losing momentum.

Meanwhile, a debt ceiling deal is making its way through Congress, with a vote scheduled in the House of Representatives today and the Senate expected to vote on it before June 5th. Unofficial estimates indicate that the deal may result in the White House reducing spending by $1 trillion, which raises the specter of a potential recession in the US.

Additionally, German inflation data is awaited and expected to show a cooling trend to 6.5% YoY in May, down from April’s 7.6%. This follows the release of Spanish inflation data, which also cooled more than projected.

The easing inflationary pressure provides relief to the European Central Bank (ECB), potentially reducing the need for aggressive interest rate hikes. Currently, the market is pricing in an additional 50 basis points of hikes this year.

DAX Outlook: Technical Analysis Points to Potential Downside

After reaching an all-time high of 16,333 earlier this month, the DAX has retraced, breaking below a rising trendline spanning multiple months and the 20-day simple moving average (sma). The index is currently testing support near the 50-day sma, with the Relative Strength Index (RSI) below 50, signaling the possibility of further downside.

A break below the 50-day sma at 15,750 could pave the way for a decline towards the May low of 15,650. Further downward movement may expose the 100-day sma at 15,170 and the psychological level of 15,000.

However, if the 50-day sma holds as support, buyers may look for a rebound above the key resistance levels of 16,000 and the rising trendline resistance at 16,100, which could bring the all-time high of 16,333 back into focus.

USD/JPY Faces Pressure from Intervention Concerns and US Debt Ceiling Vote

After recently hitting a six-month high, the USD/JPY pair is retracing from the 140.00 level following intervention concerns from Japanese authorities and the progression of the US debt ceiling bill through Congress.

Japanese Vice Minister for Financial Affairs, Masato Kanda, hinted at the possibility of intervention to support the weakening yen if deemed necessary. The authorities have intervened in the currency market on multiple occasions in the past year.

While the Bank of Japan (BoJ) maintains a dovish monetary policy and the Federal Reserve continues to hike rates, the divergence in central bank policies favors the strength of the US dollar.

Nevertheless, the yen’s gains might be limited due to weaker-than-expected data. Japanese industrial production declined by -0.4% MoM in April, contrasting predictions of a 1.4% increase. Retail sales also rose less than forecasted, reaching 5% instead of 6.9%.

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