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.