For much of the day it looked like the lead would move backwards as the lengthy layout bared its teeth in Hamburg, with under-par scores at a premium.
But Smith recovered from an early bogey to post five birdies that moved him to six under, two shots clear of last week's winner Victor Perez.
Smith won this event for his maiden DP World Tour title in 2017 a season after topping the Rankings on the European Challenge Tour.
Since then the Englishman has been one of the most consistent performers on Tour and currently sits 13th on the DP World Tour Rankings in Partnership with Rolex, finishing second at the Ras Al Khaimah Championship presented by Phoenix Capital and losing out in a play-off at the MyGolfLife Open hosted by Pecanwood.
“I have really good memories of most of the holes around here," he said. "Winning back then, even though it was five years ago, I still remember a lot of it.
"I’m looking forward to continuing the good stuff and seeing how the weekend goes."
He added: “I scrambled unbelievably well. On the back nine I was getting up and down on most of the holes and took the chances when I had them. I’m really happy with how things have gone."
Perez continued his recent good form as he fired a 71, birdieing two of his last three holes as he recovered from a bogey and a double.
The Frenchman's win at last week's Dutch Open was his second on the DP World Tour and he was delighted to maintain his momentum.
"I’m just trying to ride it as much as possible," he said. "I think we try to use those moments as players, when things go your way you hit shots and it feels easy, you try not to play quickly, which is not a bad thing for me, and you just get on with it.
"There’s a lot of golf left. It’s a long weekend, I think it’s supposed to be the same weather, nice and not very windy. I expect the Tour to set the course as difficult as they can to control the score.
"I’m very pleased again. I thought the course played very difficult. The pins were harder than yesterday, there was less wind but sometimes it’s still just as difficult."
Lagergren sandwiched bogeys at the 12th and 14th with gains at the 11th and 15th but then birdied the 17th, 18th and first to lead by three before dropping five shots in as many holes to open the door to the rest of the field.
With the tough scoring conditions, a host of players were jostling for the lead and Smith and Perez both found themselves in a six-way tie at three under.
Smith had three-putted the third but he put an approach to ten feet at the fourth and took advantage of the par-five ninth to join the lead.
Perez, meanwhile, had birdied the first from six feet but found water at the fourth to surrender his double before he too made the most of the ninth.
Smith hit the front on his own with an approach to ten feet at the tenth and then holed a 17-footer on the 14th before narrowly avoiding the water on the last and getting up and down for a closing birdie.
A three-putt on the 13th had dropped Perez further back but he hit a stunning driver off the deck to set up an up-and-down on the par-five 16th before making a two-putt birdie on the last.
Møller birdied the first, eighth and ninth and while he bogeyed the 14th, a hat-trick of closing gains handed him the lowest round of the day with a 67.
Brun carded two birdies and two bogeys in a 72, one shot less than countryman Guerrier, while Li signed for a 75.