Source: PaxForex Premium Analytics Portal, Fundamental Insight
Most Asian markets were closed in observance of the Chinese Lunar New Year, the Year of the (Wood) Rabbit. The impact on European and US markets will be less severe than on its Asian counterparts, as the fourth quarter earnings season will gather momentum. Companies who reported last week confirmed a deteriorating earnings picture as inflation provided a significant headwind while central banks increased interest rates. Both trends should continue during the first quarter of 2023. Economic data also points towards an acceleration toward a recession, and the combination of all factors bodes well for an extension of the current bear market, which is unlikely to end until a recession alleviates inflation and inflationary expectations and cools the red-hot labor market.
The Euro STOXX 50 rallied roughly 6% in 2023, placing it on course for its best January since 2019, while its US counterparts either turned negative for the year or wiped out most gains. Earnings season will determine if it is another bull trap or if Europe will outperform the US. Companies have already warned that they find it increasingly difficult to pass on higher costs to consumers, suggesting earnings will deteriorate. Corporate outlooks are also expected to provide little upside hope amid persistent inflation, which has receded, but the factors were short-term due to a drop in energy prices. The reopening of China will boost their economy and demand, creating a fresh inflationary tailwind. While the Euro STOXX 50 enjoyed a surprising start to 2023, traders should prepare for more downside ahead.
The forecast for the Euro STOXX 50 turned bearish after this equity index accelerated into its horizontal resistance area, from where upside momentum faded. Volatility could increase as bulls and bears square off at resistance to establish control over the next directional move. The Kijun-sen flatlined, confirming the lack of short-term bullishness, but the Tenkan-sen maintains its upward movement for now, which is likely to end this week. Adding to the bearish outlook is the narrowing Ichimoku Kinko Hyo Cloud. It may approach bearish crossover territory shortly and can trigger the next leg lower. Traders should also monitor the CCI after it recorded a lower high in extreme overbought territory, followed by a breakdown. A move below zero would provide the final sell signal for this equity index. Can bears overpower bulls and force the Euro STOXX 50 into its horizontal support area? Subscribe to the PaxForex Daily Fundamental Analysis and earn over 5,000 pips per month.
Should price action for the Euro STOXX 50 Index remain inside the or breakdown below the 4,095 to 4,170 zone, PaxForex recommends the following trade set-up:
- Timeframe: D1
- Recommendation: Short Position
- Entry Level: Short Position @ 4.140
- Take Profit Zone: 3.650 – 3,760
- Stop Loss Level: 4.220
Should price action for the Euro STOXX 50 Index breakout above 4,170, PaxForex recommends the following trade set-up:
- Timeframe: D1
- Recommendation: Long Position
- Entry Level: Long Position @ 4.220
- Take Profit Zone: 4.270 – 4.310
- Stop Loss Level: 4.170
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