Dow Jones Falls as Debt Ceiling Concerns Mount

May 25, 2023

The Dow Jones Industrial Average extended its decline for the fourth consecutive day amidst mounting concerns over a potential default as U.S. lawmakers struggled to reach an agreement on the country’s debt ceiling. The Dow dropped 255.59 points, or 0.77%, closing at 32,799.92, while the S&P 500 and Nasdaq Composite also experienced losses. House Speaker Kevin McCarthy blamed Democrats for delayed negotiations on spending caps and expressed hope for progress. Treasury Secretary Janet Yellen warned of a “highly likely” default in early June, leading to stress in financial markets. The market remained cautious due to overbought conditions and growing fears about an unfavorable debt ceiling outcome.

Despite the Federal Reserve’s minutes indicating uncertainty about raising rates in June, stocks continued to hover near their lows. Investors were selling amid heightened fears, leading to a “pullback mode” in the market. The ongoing earnings season saw surprises as Kohl’s and Abercrombie & Fitch reported unexpected profits, resulting in significant stock increases. Semiconductor giant Nvidia’s results were eagerly anticipated after the closing bell. With June 1 approaching, the market remained apprehensive, awaiting further data releases and developments surrounding the debt ceiling negotiations.

Data by Bloomberg

On Wednesday, all sectors of the market experienced a decline, with the overall market decreasing by 0.73%. The energy sector was the only one to see a slight increase of 0.52%. The sectors that suffered the most significant losses were real estate (-2.21%), financials (-1.31%), and industrials (-1.27%). Other sectors that experienced declines include materials (-1.12%), health care (-0.66%), consumer staples (-0.65%), utilities (-0.63%), information technology (-0.62%), communication services (-0.60%), and consumer discretionary (-0.23%).

Major Pair Movement

The USD index reached a two-month high of 103.91 due to ongoing uncertainty surrounding the U.S. debt ceiling and rising geopolitical tensions between China and Russia, which increased risk aversion in the market. The dollar held onto its gains as the Federal Reserve Governor Christopher Waller made relatively hawkish comments, expressing concerns about inflation and stating that his decision on whether to raise interest rates in June would depend on upcoming data. The Fed minutes from their May meeting provided no new insights for near-term policy direction, although some participants believed additional policy tightening might be necessary if the economy followed their outlook.

In currency markets, the euro weakened slightly against the dollar, while EUR/GBP saw some buying activity despite higher-than-expected UK inflation. USD/JPY broke above recent resistance levels but retreated from its peak as the Fed minutes failed to provide fresh momentum for expectations of higher U.S. rates. GBP/USD continued its decline amid broader risk-off sentiment related to the debt ceiling crisis, and the UK inflation miss raised doubts about the government’s ability to manage inflation as forecast. In the cryptocurrency market, Bitcoin experienced a 3.5% drop to $26.3k, influenced by the outlook of higher interest rates from the Fed, with support levels at risk of being breached.

Picks of the Day Analysis

EUR/USD (4 Hours)

EUR/USD Continues Downward Trend as US Dollar Strengthens Amid Uncertainty

The EUR/USD pair declined for the second consecutive day, marking its lowest daily close in two months, as a stronger US Dollar remained the dominant factor. The Greenback was supported by higher Treasury yields and risk aversion, causing the pair to retreat towards 1.0750 after a brief recovery during the European session. In economic news, the German IFO Business Climate Index dropped to 91.7 in May, falling short of market expectations. The Euro remained unaffected by the report.

Meanwhile, the Federal Open Market Committee (FOMC) minutes revealed a division among officials regarding future interest rates, with uncertainty surrounding the need for further policy tightening. Market sentiment worsened due to a bleak growth outlook and ongoing debt-ceiling negotiations in Washington. On the horizon, upcoming economic reports in the US include Jobless Claims.

Chart EURUSD by TradingView

According to technical analysis, the EUR/USD pair is currently experiencing a minor consolidation and attempting to break its lowest price, putting pressure on the lower band of the Bollinger Bands. It is expected that the EUR/USD will continue to consolidate and gradually decline. The Relative Strength Index (RSI) is currently at 36, indicating bearish sentiment for the EUR/USD.

Resistance: 1.0788, 1.0848

Support: 1.0715, 1.0655

XAU/USD (4 Hours)

Gold (XAU/USD) Pressured as Risk Aversion and Fed Uncertainty Weigh on Markets

Gold prices (XAU/USD) encountered downward pressure on Wednesday as risk aversion gripped financial markets, leading to a dip in XAU/USD. The cautious sentiment benefited the US Dollar, pushing the price of gold toward daily lows around $1,956. The market unease was fueled by United States House Speaker Kevin McCarthy’s comments, highlighting significant differences in debt ceiling extension talks with President Joe Biden, focusing on spending cuts and opposition to tax hikes. McCarthy, however, expressed optimism about avoiding a default and eventually reaching a deal. Additionally, uncertainty surrounding the Federal Reserve’s future monetary policy further dampened sentiment, as investors eagerly awaited the release of the FOMC meeting minutes for insights. Recent hawkish comments from policymakers regarding possible rate hikes added to the prevailing cautious mood in the market.

Chart XAUUSD by TradingView

According to technical analysis, XAU/USD is moving lower on Wednesday and attempting to reach the lowest price of the week while approaching the lower band of the Bollinger Bands. There is a possibility that XAU/USD will continue to fluctuate between the support and resistance levels. Currently, the Relative Strength Index (RSI) stands at 40, indicating that XAU/USD is in a neutral but bearish position.

Resistance: $1,991, $2,013

Support: $1,950, $1,934

Economic Data