During the ECB’s annual gathering in Sintra, both Jerome Powell and Christine Lagarde emphasized the importance of tackling inflation and indicated that their job was not yet complete. Lagarde confirmed the European Central Bank’s intention to raise rates in July, and the upcoming release of eurozone consumer price data will provide insights into the possibility of further rate increases this year.

The June CPI figure for the eurozone was 5.5%, slightly better than expected and a decline from last month’s 6.1%. French inflation reached a 14-month low, following the trend set by Spain and Italy, while German consumer price gains accelerated. Germany’s CPI increased to 6.4% from a 14-month low in May. Traders anticipate the ECB’s deposit peak rate to reach 4%, with another increase projected for July, and a potential additional hike in September.

German exports have displayed high volatility since last summer, with an overall downward trend rather than an upward one. Trade is no longer a robust growth driver for the German economy due to factors such as supply chain disruptions, a more fragmented global economy, and China’s increasing ability to produce goods it previously imported from Germany. German exports to China have decreased from nearly 8% to 6% of total exports since the pandemic, while Germany’s import dependence on China remains high as energy transition is almost impossible without Chinese raw materials or solar panels.

The ongoing weakening of export order books, the anticipated US economic slowdown (which constitutes roughly 10% of total German exports), high inflation, and increased uncertainty will likely impact German exports in the near term. However, the CEE countries currently account for over 11% of total German exports, offer a partial silver lining.

In June, growth in Germany’s services sector slowed, indicating a loss of momentum despite a recent resurgence in demand. The services PMI declined to 54.1 from a 13-month high of 57.2 in May but remained above the growth threshold of 50. The composite PMI, which includes services and manufacturing, fell to a five-month low of 50.6 in June, suggesting moderate growth in the overall economy for the second quarter and is only slightly above the growth threshold.

While Germany may potentially avoid a continuation of the recession that began in the fourth quarter of the previous year, there is a heightened risk of the economy slipping into another recession in the latter half of 2023.

Source: TradingView, 1Year DAX 40 Daily Chart

Investors were also concerned about China’s faltering economic recovery, leading to a further decline in the DAX 40 index on Wednesday. A lower high has clearly emerged on the daily chart, increasing the probability of the formation of a head and shoulders.

A break below minor support of 15,629 would confirm the pattern and could trigger a decline to the 15,400 – 15,250 range. The quadruple bearish divergence between the price and the Relative Strength Index (RSI) indicator also throws a negative cast on the chart, pointing to a likely deeper pull back in the near-term.

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