The European Central Bank is widely expected to lift interest rates by 25-basis point at its next policy meeting in early May, potentially followed by a final 25-basis point hike in June, as inflation remains uncomfortably high.

Even if further monetary policy tightening undermines the economic outlook for the eurozone, the European Central Bank is not in a position to consider a reversal from its current stance until both projected and actual inflation are clearly moving towards its target of 2%.

Despite ongoing challenges such as the war in Ukraine and the associated sanctions against Russia, the German government predicts that the peak in underlying inflation has been reached. The annual inflation rate stood at 7.4% in March, severely eroding consumers‘ purchasing power. The German government said it expects inflation to slow to 5.9% this year, from 6.9% in 2022, and dropping to 2.7% in 2024.

The government has slightly raised its economic growth forecast for 2023 to 0.4% from a previously projected 0.2% and expects the expansion to accelerate to 1.6% next year. While gross domestic product would still be relatively weak, the economy ministry was projecting a contraction of the same magnitude last October.

Recent economic figures have given grounds for optimism, with factory orders and exports increasing in February and a closely watched barometer of business confidence consistently rising for the past seven months. German first-quarter gross domestic product (GDP) figures are due on Friday.

The German GfK Consumer Climate Indicator jumped to a 13-month high and increased to -25.7 heading into May, which is the highest level since April 2022, and slightly above market forecasts of -27.9.

Despite strong Germany GfK Consumer Climate Indicator data released earlier in the week, the DAX 40 index remains trapped in a tight range between 15,964 and 15,919 as the disappointing news from First Republic Bank weighed on banking stocks, particularly in the U.S. but to a certain degree in Europe as well.

German exports remain at a rather low level by long-term standards. Sentiment among German exporters has rebounded in April to the highest point seen since the start of the war in Ukraine in February 2022, according to a survey by the Ifo economic institute.

Source: Tradingview

The German benchmark index traded sideways on Thursday, as investors digested a slew of corporate earnings, with the banking sector in particular focus. The quarterly reporting season in Europe is in full swing, with the banking sector to the fore.

Deutsche Bank posted a better-than-expected 9% rise in first-quarter profit, defying banking jitters, as income from higher interest rates has offset a slump in revenues at the investment bank arm.

All these positive results in Germany this week have helped ease worries about contagion after U.S. regional lender First Republic Bank shares plunged, after the bank revealed $100 billion in customer withdrawals last month, raising fears about its long-term viability.

The rally from the March low has stalled after hitting a 15-month high as concerns about the health of the banking sector and global recession fears reignited. While at this point there is no reversal signal evident on the daily chart of the DAX 40 index, the proximity to its all-time high of 16,285 and the formation of a triple bearish divergence between the price and the Relative Strength Indicator raises question about the sustainability of the rally.

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