Flash euro zone inflation for March surprised with a larger-than-expected 1.6% drop during the month falling to 6.9%, down from 8.5% the prior month. This is the fifth consecutive monthly decline, however; the reading remains well above the European Central Bank’s target of 2%.

Core inflation, which excludes the volatile food and energy items, ticked up and hit a new record high of 5.7% for the bloc in March, putting enormous pressure on European Central Bank officials to continue on with further interest rate hikes.

Last month the ECB raised its main interest rate to 3% but did not offer guidance for its next meeting on the 4^th of May, citing that the recent financial turmoil requires caution. Since then, however; several policymakers have signalled that more tightening might be necessary. While the decision of the ECB would be data-depended, markets have fully priced in a 25-basis point rate hike in May and another 25-basis point increase in June.

German equities posted healthy gains over the past six months, and investors have remained pretty buoyant despite the latest banking turmoil and the surprise production cut on Sunday by OPEC+ which triggered a sharp spike in oil prices at the beginning of the week.

Higher oil prices could filter through the global economy and have a significant inflationary impact. This is certainly a worry for central banks which have been trying to fight sky high inflation over the past year.

Earlier this week data showed that manufacturing activity in the euro zone remained in contraction territory, raising fears of an economic slowdown in the bloc. However, German exports posted their biggest monthly rise since June in February, boosting hopes the country may avoid recession in the first quarter of 2023.

The S&P Global Germany Services PMI was revised slightly lower to 53.7 in March of 2023 from a preliminary estimate of 53.9 but continued to point to the strongest growth in the services sector since May last year.

Data released on Thursday showed that Industrial production in Germany surged 2.0% month-on-month in February, beating market forecasts of 0.1%. The DAX 40 traded higher on the news but risk sentiment remains fragile as the economy is slowing down.

The banking crisis has not dented demand for stocks and the Frankfurt benchmark index managed to reclaim its pre-banking turmoil highs. Hopes that the ECB may be approaching the end of its aggressive interest rate hiking cycle is supporting the equity market.

The DAX 40 index is holding up its last week’s gains, despite concerns about the spike in oil prices and the slowing manufacturing activity data. However, given the proximity to the multiple resistance around 15,700 combined with worries that the economy is cooling, further gains from here may be limited.

While at this point there is no reversal signal evident on the daily chart, we note the formation of a bearish divergence between the price and the Relative Index Indicator, which suggests that the rally from the September 2022 low might be approaching a turning point.

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