The German Dax index rose almost 1% on Monday in line with the broadly positive sentiment across European markets with improvements in the services sector. However, its uptrend may be disrupted.
The index could face a potential downside risk as tariff threats loom. A weakening Eurozone job market is affecting the DAX’s start to the new year, with auto and tech companies leading a broad market fall. A weaker Euro and a dovish ECB could give the essential support for German exporters as global concerns rise.
Tariffs Threat
Fears of US tariffs targeting German car manufacturers and weak demand from China weighed on auto stocks. Bank stocks could also be affected. U.S. banking sector deregulation could make European banks less competitive, potentially impacting earnings. German stocks had a bad start for the year as tariffs will remain in play.
German Labor Market
Unemployment claims from Germany increased by 10K in December, following a 7K rise in November. The modest increase left Germany’s unemployment rate unchanged at 6.1%.
Concerns about a weakening Euro Area labor market have fueled expectations for multiple ECB rate cuts. A dovish ECB could weigh on the Euro, potentially offsetting the impact of U.S. tariffs by boosting the competitiveness of German exports.
German Manufacturing & Services PMI
Germany’s HCOB manufacturing PMI dropped to 42.0 in December, down from 43.0 in November. The PMI survey highlighted weak domestic and overseas demand and further job cuts. Price trends also reflected subdued demand while supporting a more dovish ECB rate path.
Germany’s HCOB services PMI reported an increase from 49.3 in November to 51.2 in December which shows improvement in the sector. It is still unclear whether the services sector is in a slow downturn or on the brink of stabilization leading to recovery. Services employment has been cautiously cut since July, and new businesses have been shrinking slowly since September.
German CPI
Annual CPI in Germany rose to 2.6%, exceeding forecasts. This factor may add pressure to German stocks and could cause the ECB to change its stance on its interest rates.
Conclusion
The DAX will be heavily influenced by upcoming U.S. data (Services PMI, FOMC Minutes and NFP), tariff developments, and the ECB’s rate path. Better-than-expected U.S. data and dovish ECB may drive the DAX higher. However, tariff threats and weak U.S. data could cause bearish sentiment to dominate the DAX.
Technical Analysis
Source: TradingView, Trading Economics
Price broke out of its range from 20,000, with bulls driving the price higher. Traders will be watching for potential pullbacks after the index breached two resistance levels. If bulls maintain their momentum, traders will monitor 20,300 as a potential resistance. In a bearish scenario where price fails to hold its momentum, price could fall back to the pivot line where it can be considered as support around 19,900. A major potential support at 19,760 might be monitored by traders if the price is unable to hold above the pivot line.
