Dax Index price rotates lower as EU cuts economic forecasts

Dax Index price rotates lower as EU cuts economic forecasts
Written by:
Michael Harris
8th July, 12:55
  • The European Commission cuts 2020 GDP forecasts from -7.4% to -8.3%
  • For the next year, the EU expects recovery to be at 5.8%, instead of previously forecasted 6.1%
  • DAX Index has mostly struggled this week, threatening to close the week in the red
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DAX Index price is struggling to move higher for the fourth consecutive day, threatening to close this week in the red. Separately, the European Commission slashed economic forecasts for the region. 

Fundamental analysis: EU cuts forecasts

The European Commission cut its 2020 and 2021 estimates yesterday as the  Covid-19 pandemic outbreak continues to claim lives in all of 27 EU member states. 

The European Union’s executive branch estimates that the GDP will decline by 8.3% this year, followed by a recovery of 5.8% next year. Back in May, the Commission forecasted 7.4% reduction for total GDP across all of the member states in 2020, with a rebound of 6.1% in 2021.

“The economic impact of the lockdown is more severe than we initially expected. We continue to navigate in stormy waters and face many risks, including another major wave of infections,” said Valdis Dombrovskis, vice-president of the European Commission.

The 2020 and 2021 prospects have gotten even worse over the last few months in spite of measures that EU countries took to reanimate their economies. According to the Commission’s expectations, the economic activity will start improving in the second half of 2020, however, it will still be “incomplete” due to social-distancing rules.

Some of the EU member states such as Spain and Portugal have reinstated certain measures due to an increase in the number of coronavirus cases. According to the estimates, economic activity in Italia will suffer the most, with a contraction of 11.2% in 2020. 

It will take some time for tourism and other services to recuperate, even though Italia started reducing its lockdown measures in May. As a result, there are no expectations for an economic rebound in this year. However, a rebound of 6.1% is expected for 2021.

Apart from Italia, France and Spain are also estimated to suffer economic blows in 2020, with the Commission expecting a 10.6% contraction in France and 10.9% in Spain. These estimates have gotten worse compared to the previous estimates in May when the Commission forecasted a drop of 8.2% and 9.4%, respectively.  

Technical analysis: Bullish run has ended?

DAX Index price is struggling to extend the bullish momentum higher after three consecutive daily closures in the red. In June, the index gained over 6%, mainly boosted by the gradual reopening of European economies. 

Dax Index weekly chart (TradingView)

On Monday, the price action came close to testing the June highs near 12900 before the sellers managed to reverse the trend direction. 

This zone will continue to act as resistance while 12700 will also offer supply from the side of the sellers. On the downside, the break of the ascending trend line could prove to be a major bearish development, paving the way for a sharp move lower.

Summary

DAX Index price is struggling near 12900 as the sellers seem to be in control in the short-term. The EU economic activity is expected to continue suffering, which led the European Commission to slash economic forecasts for the region. 

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