Forex

The US debt ceiling issue has the potential to greatly affect the forex market in May 2023. The US currency may lose its appeal if the debt ceiling is not flexed and the government fails to fulfill its obligations. This might result in a decline in the dollar's value relative to other currencies and raise currency market volatility.

EUR/USD pair has been unrelenting following the bearish break below 1.0910 in May. The dollar has been stronger relative to other major currencies, including the euro, thanks to shifting US rate expectations. At the time that three regional US banks collapsed, traders initially anticipated that the Fed would decrease interest rates by about 75 basis points before the year ended. The consequences were felt in Europe, where local rival UBS had to absorb the already struggling Credit Swiss.

Despite the fact that bank indices have not yet fully recovered, the banking industry has since stabilized. More lately, as the Fed considers another 25-bps raise or a "skip" - effectively giving the Fed greater flexibility - sustained US inflation has caused markets to reconsider the trajectory of future interest rates.

For GBPUSD the data from retail traders reveals that 48.19% of trading individuals are net long, with a short-to-long ratio of 1.08 to 1. Since May 22, when GBP/USD traded near 1.24, traders have maintained a net short position; since then, the price has fallen by 0.18%. However, the number of traders who are net-long decreased by 17.40% from yesterday and by 20.80% from the previous week. The number of traders who are net short has increased by 27.34% from yesterday and by 9.64% from the previous week.

After the Chinese PMI fell short of expectations, the Australian Dollar fell to a 6-month low of under 65 cents. The information has fueled the idea that the second-largest economy in the world is having trouble rekindling growth as it emerges from the epidemic era.

Chinese manufacturing PMI data for May came in at 48.8 versus the expected 49.5, and the non-manufacturing component registered at 54.5 versus the anticipated 55.2. As a result, the composite PMI reading decreased from 54.4 to 52.9.

A survey of around 3,000 manufacturers in China, mostly large businesses, produced the China PMI indices. Since it is a diffusion indicator, a reading above 50 is favorable for the Middle Kingdom's economic future.

Commodities

Our estimates consider the major trends that have emerged in May 2023, such as the contrast between the reopening of the Chinese economy and the danger of a recession in developed nations, as well as the ambiguous picture for the supply of commodities. Recent favorable data releases have not diminished the likelihood of additional stimulus assistance. Thus, the momentum of China's reopening is still in its favor.

After rebounding to its lowest levels in ten weeks, the price of gold picks up bids to renew an intraday high as buyers celebrate a two-day winning run. As markets wait for the US House of Representatives to vote on the debt ceiling accord, the XAU/USD fails to explain the recent recovery in the US Dollar Index (DXY), but it does appropriately applaud the depressed Treasury bond yields.

Due to ongoing anxiety over the debt ceiling and traders taking profits from the recent rally, the price of oil rolled over and declines on Thursday. The US dollar, which is also strengthening and is the primary currency used to price crude, is under pressure. Following the publication of encouraging data, the Dollar Index (DXY) has broken through the psychological barrier of 104.00 and is now rising.

Indices

The S&P 500 Index saw a continued rise, but the mid-cap, small-cap, and emerging markets declined, indicating narrow market breadth. On May 3rd, the Federal Reserve raised the Fed funds rate by another 0.25%, potentially marking the last increase in this cycle. Debate persists regarding the lag effects of rate increases on the economy and the turning point for corporate earnings.

Market consensus leaned towards easing rates later in the year, but market gains remained concentrated in technology sectors. Inflation remains a focus for the Fed, with rates above the targeted 2% level, while economic growth slows but remains positive. Higher interest rates impacted regional banks, with First Republic Bank's failure being the second-largest bank failure in U.S. history.

Banks are still catching up with rate increases, and lending standards are tightening, which may impact consumers, the economy, and corporate profits. Although Q1 earnings reports beat expectations, corporate earnings might not stabilize until after the Fed's most recent rise. Bond investors may not be adequately rewarded for risk-taking, as credit markets are not pricing in a larger economic slowdown.

Market Events

Reserve Bank of Australia raised the cash rate by 1.25% announced on May 2. In the same week, on May 4, US Federal Reserve declared a 0.25% rise in the federal fund rate. The non- farm employment change in Canada was reported to increase by 72K on May 6. Bank of England decided to increase the official bank rate by 0.25% on May 11. Office for National Statistics of the UK announced a 15.5K rise in the claimant counts change that pushed the GBPUSD price below $1.2500 on May 16.

US officials are prepared to proceed with an additional 50 basis point interest rate increase, according to Fed minutes released on May 25. Furthermore, the Federal Open Market Committee warned that policy may need to cross the "neutral" line and into the "restrictive" realm. The minutes show that members are hopeful that they can reduce inflation but are equally worried about potential threats to financial stability.