Financial markets traded higher on Monday after positive ISM non-manufacturing data and upbeat comments from billionaire Warren Buffett boosted global equity markets. The US Dow Jones Industrial Average finished the session higher by 0.11%, while the Nasdaq climbed 0.34% and the S&P 500 rose 0.19%.
In currencies, GBP/USD traded in a tight range of just about 20 pips for most of the day while EUR/USD traded in an even tighter space. USD/JPY dropped back to a low of 101.87 but bounced off support to finish the day around 102.2. The mild gyrations in FX come after significant movements in the week prior and with several central bank announcements to come later in the week. Meanwhile, gold continued to rally. The precious metal opened well above its pivot before climbing to a close of $1309 per ounce.
Company earnings
Company reports will continue to affect markets this week and we will see figures from a number of big hitters, including Walt Disney Company (NYSE:DIS), the world’s largest entertainment company, and Mosaic Company (NYSE:MOS), the largest Potash producer in the US.
So far, earnings have beaten expectations across the board and the average profit for S&P 500 members has increased by 4.6% on quarterly basis.
Warren Buffett said in his annual meeting on May 3 “Anybody that thinks American business is not doing well should just look at corporate profits” and it is this sort of positive comment that is helping to drive stock markets towards new highs.
Clearly, equity markets are in agreement with Buffett, so much so that US indices reversed sharp early losses on Monday to continue the upward trend. Even declining manufacturing data in China, and escalating turmoil in Ukraine, could do little to destroy stock market traders enthusiasm.
Central bank action
There is plenty of action on the global stage from the world’s central banks this week and this will impact the majority of FX traders’ trading plans.
On Tuesday, the Reserve Bank of Australia will decide whether to hold interest rates at 2.50% or cut them in order to induce a weaker exchange rate. Analysts currently expect rates to be kept on hold so RBA minutes on Friday could be the most important market driver for AUD/USD There will also be Australian unemployment numbers to digest on Thursday.
Also on Thursday, we will see central bank decisions from the BOE and ECB. Both events are likely to inspire big movements in the currency space, particularly with both GBP/USD and EUR/USDnot far away from multi-year highs.
On Wednesday, we will also see Fed Chair Janet Yellen testify to the Joint Economic Committee.
EUR/USD outlook
At 1.3880, EUR/USD is only 80 pips or so away from multi year highs and with the upcoming ECB meeting scheduled for Thursday, it should be an interesting week for EUR/USD traders.
The previous Friday, the euro looked the weakest for some time as US non-farm payrolls came out far better than expected and cause the currency to dip around 50 pips in quick succession. However, the currency regained composure and ended up posting strong gains, indicating that there is more to come from this bull market.
The worry for traders is that the market is in a significant one-sided bias here with only 25% of open positions long positions according to large forex broker Oanda. The implication is that EURUSD is due a pullback and central bank policy could be the catalyst to make that happen. Traders will not want to hold too many longs ahead of the ECB’s meeting on Thursday as risk is skewed to the downside here. That will give bulls a better chance to go long.