The war in Ukraine represented a major drag on European economies and the common currency. It should because the sanctions imposed by Western nations also have a boomerang effect – they are weakening the Russian and European economies.
But most of the economic fears have faded away recently.
For instance, natural gas prices have come down from their highs. A mild winter allowed Europe to weather the energy crisis much better than initially thought.
Also, the European Central Bank does not forecast a recession anymore in the euro area. Therefore, optimism replaced doomsday scenarios in Europe.
As a result, the common currency, the euro, rallied. But no other market expresses optimism in Europe like the German Dax index.
It gained over 1,000 points in 2023, and we are barely passed mid-January. So what will happen next?
The Dax rallied since last October. Curiously enough, the euro bottomed at the same time.
Since then, the Dax and the euro have been well above their lows. EUR/USD, for instance, the most important currency pair, rallied over 1.3k pips from its October lows.
In other words, investors are optimistic about European prospects. Should we expect some more from the Dax index?
The technical picture supports more upside. The market finished a falling wedge pattern last October and then broke above the upper trendline.
It even retested the trendline, only to find support at the 13,000 area. Such a retest is extremely common and validates the reversal pattern.
Moreover, it is not unusual for the price action to fully retrace a wedge pattern. If that is the case, then the Dax index looks poised to make a new all-time high.
That would be odd, given the challenges in Europe, but it is also possible because the negative sentiment leaves room for a short squeeze. On the flip side, if the Dax index cannot hold above 14,000 points, bears will try to push it back to the lowest point in the falling wedge pattern.
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