European shares flashed red on Thursday as investors digested the latest rate hike by the Federal Reserve (Fed) and prepared for the European Central Bank’s (ECB) policy decision later today.

As widely expected, the Fed raised interest rates by 25 basis points (bps) and hinted at a pause in further increases during its meeting on Wednesday. However, Fed Chair Jerome Powell left some doubt after stating that economic developments could require further tightening. This sent the S&P 500 tumbling toward the 4070-support level on the daily charts. Nevertheless, the index still remains trapped within a range with a breakout on the horizon.

Our focus this morning falls on the STOX50 Index which could be influenced by the ECB rate decision.

The central bank is expected to raise interest rates by 25 bps, which would mark a downshift from 50 bps hikes triggered at each of its previous three policy meetings. However, core inflation remains sticky at 5.6% in April, still close to the all-time high of 5.7%. If still-stubborn inflation encourages policymakers to signal more hikes into the summer, this could rekindle growth fears – especially when factoring in how the eurozone narrowly avoided recession in Q1 2023. Such a development may weigh on European shares – dragging the STOX50 lower.

A deep dive into the technical picture…

The STOX50 index on the D1 time frame was in an uptrend which made a last higher top at 4427.5 on 21 April, bears then saw an opening and started accumulating positions.

After the top at 4427.5, prices broke through the 15 and 34 Simple Moving Averages (SMA) and the Momentum Oscillator changed direction to the lower side, both further confirming the growing bearish sentiment in the market.

A possible critical support level might be forming near the 34 Simple Moving Average on 4 May at 4272.5. If the level holds and the bulls manage to push the price higher, then a resistance level that formed at a lower top on 27 April at 4398.8 will be a good risk management area.

If bears manage to break through the potential critical support level at 4272.5, three possible price targets can be projected from there. Attaching the Fibonacci tool to the bottom at 4272.5, and dragging it to the lower top at 4398.8, the following targets may be calculated. The first target can be estimated at 4194.4 (161.8%) which is located at a weekly support level. The second price target may be calculated at 4068.1 (261.8%) and if the price manages to break through yet another weekly support level, then the third and final target might be expected at 3863.8 (423.6%).

If the resistance level at 4398.8 is broken, the above scenario is no longer valid.

As long as the bears keep on pulling the price down, the outlook for STOX50 on the D1 time frame will remain bearish.