DAX forecast: German election lifts sentiment, but gains likely capped

The DAX futures surged during the Asian session overnight, setting a positive tone as the German markets opened this morning. Investors welcomed the outcome of Germany’s election, which saw centrist parties positioned to form a coalition. However, while the initial reaction was upbeat, it remains to be seen whether the enthusiasm will be maintained deeper into the week, or even the session once US investors come to the fray. Additionally, lingering tensions between the US and Europe could temper risk appetite, particularly after last week’s cautious trading, when concerns over US President Donald Trump’s stance on tariffs, coupled with stretched valuations, unsettled investors. For these reasons, we maintain a cautious DAX forecast despite a positive start to the week.

German election lifts stocks but transatlantic tensions pose challenge to DAX forecast

Christian Democratic Union (CDU) leader Friedrich Merz is set to take the reins as Germany’s next Chancellor, following a decisive electoral victory. However, his path forward is anything but straightforward, with coalition talks expected to be arduous, particularly with the Social Democratic Party (SPD). While the market has welcomed the election outcome, any significant economic impact is likely to be modest. The coalition’s policy agenda is not expected to deliver transformative economic reforms beyond minor tax reductions and limited regulatory adjustments, meaning the DAX’s gains could remain constrained.

Friedrich Merz has already set a striking new tone for Europe’s strategic outlook, stressing the urgency of European self-reliance, questioning NATO’s long-term viability and advocating for stronger continental defence.

There’s deep unease among European powers, rattled by Trump’s unpredictability and the potential erosion of US security guarantees that has been in place for about 80 years. Merz’s comments underscored the gravity of the situation: “My absolute priority will be to strengthen Europe as quickly as possible so that, step by step, we can achieve true independence from the USA.” His remarks signal a diplomatic recalibration that could redefine the balance of power in the West.

ECB rate cut speculation offers support

Despite geopolitical uncertainties, the DAX may find some downside protection from the European Central Bank’s increasingly dovish stance. Over the weekend, ECB policymaker François Villeroy de Galhau reaffirmed expectations that the central bank will lower its deposit rate to 2% by the summer.

His comments followed Friday’s eurozone flash PMI data, which showed the composite PMI holding steady at 50.2, below the expected 50.5. Meanwhile, the latest German Ifo business climate reading for February disappointed, coming in at 85.2 versus a forecast of 85.8.

While these economic indicators suggest ongoing weakness, the prospect of further monetary easing may help cushion the DAX from significant falls. Still, I reckon we could see a quick end to the election-related enthusiasm as the focus returns to trade wars, which may keep markets in a cautious state for a while.

Technical DAX forecast: key levels to watch

Source: TradingView.com

The technical DAX forecast has not yet turned bearish given that it has managed to hold itself inside a short-term bullish channel that has been established since the start of the year. But that’s not to say technical bias will not turn bearish in the coming days. Watch for signs of bulls getting trapped – for example if the index were to go back below Friday’s high of 22,396. This level is now support and if it doesn’t hold, it could put the bulls in a bit of trouble. What’s more, the Relative Strength Index (RSI) remains at severely overbought levels on the higher time frames like the weekly and monthly charts. The daily RSI has only now started to ease off the 70.0 threshold, but it certainly needs further unwinding before the DAX becomes more technically neutral for majority of the dip buyers.

Anyway, we will cross that bridge if and when we get there – for now, keep an eye on short-term support at 22396 and resistance at 22720.

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R