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Is the DAX index a safe buy after the ECB jumbo rate hike?

on Sep 8, 2022
  • The DAX index has embarked on a strong sell-off in the past two week.
  • The European Central Bank decided to deliver a jumbo rate hike.
  • It warned that more rate hikes are highly likely in the coming months.

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The DAX index pulled back on Thursday after the latest interest rate decision by the European Central Bank (ECB). It retreated to a low of €12,825, which was about 8.15% below the highest point in August. Other European benchmark indices like CAC 40 and Stoxx 40 also retreated.

More challenges for German companies

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The DAX 40 index retreated after the ECB concluded its two-day monetary policy meeting. The bank decided to hike interest rates by 75 basis points, the biggest increase since 1999. Its deposit facility rate rose from 0.00% to 0.75% while the marginal lending facility increased from 0.755 to 1.50%. The benchmark rate rose from 0.50% to 1.25%. These rate hikes were in line with expectations as we wrote here.

In a statement, Christine Lagarde said that the extremely tough position was necessary to contain the runaway inflation in the bloc. Data published last week revealed that the bloc’s inflation soared to a record high in August. In its estimate, the bank now expects that the headline consumer price index will average 6.8% in 2022 and then retreat slightly to 3.4% in 2023. The ECB statement said:

“This major step frontloads the transition from the prevailing highly accommodative level of policy rates towards levels that will ensure the timely return of inflation to the ECB’s 2% medium-term target.”

The DAX index declined because historically, stocks underperform in periods of aggressive monetary policy. 

In addition, the index has fallen because of the elevated risk of a recession in the region. Russia has already stopped gas flows to Europe as it fights to have sanctions lifed. As a result, gas prices have soared to historic levels, leading to thinning corporate margins. Some manufacturing companies have also decided to close or reduce operations.

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The DAX 40 index has also been hit by the sliding euro. While a weaker euro is positive for exporters, it has made it significantly expensive for them to import raw materials.

DAX index forecast

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DAX index

The DAX index has been in a strong bearish trend since mid-August. This sell-off has been supported by the 25-day and 50-day moving averages. Additionally, the Awesome Oscillator has formed a bullish divergence pattern. 

The index has also moved slightly above the important support level at €12,417, which was the lowest level in July. Therefore, the path of the least resistance for the blue-chip German index is downwards, with the next key support being at €12,417.


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