Euro Drops on Paris Terrorist Shooting ahead of Election, Dollar Lifted as Tax Reform News

Euro dropped notably against Dollar overnight after news of terrorist attack in Paris, just ahead of presidential election this Sunday. A shooting occurred on the famous Champs-Elysees shopping boulevard, resulting in death of one police and injuries of two others. The Islamic State group claimed responsibility for the shooting. The incident disrupts the election campaign as conservative candidate Francois Fillon cancelled his trip to the Alps to "first show our solidarity with the police". Far-left Jean-Luc Melenchon said urged people to "attend to our duties as citizens: no panic, we shouldn’t interrupt our democratic process". Far-right Marine Le Pen said she was "deeply angry" on the shooting and sad for the victims. Centrist Emmanuel Macron said that "this threat, this imponderable problem, is part of our daily lives for the years to come."

For the moment, Macron and Le Pen are still tipped by polls to win the election on Sunday to go through to the run-off on May 7. But markets would be lightening up position on Euro, in case that both Euro sceptic Le Pen and Melenchon win. For the moment, EUR/USD is holding above 1.0676 minor support and further rise is still expected technically. But the common currency is staying bearish against Sterling and Yen. EUR/GBP is holding below 0.8511 resistance while EUR/JPY is kept below 118.23 resistance. Euro could turn softer before weekly close.

US Treasury Mnuchin: Close to bring forward major tax reform

On the other hand, US equities, treasury yields and Dollar were lifted by comments from US Treasury secretary Steven Mnuchin. Mnuchin said yesterday that Donald Trump’s administration is close to bringing forward "major tax reform". And, he hoped that passing the tax overhaul bills won’t "take till the end of the year". Mnuchin changed his tone on the issue and said that "whether health care gets done or health care doesn’t get done, we’re going to get tax reform done." Separately, Trump’s economic adviser Gary Cohn said that the administration is going to come up with a "unified, united tax proposal from the White House that will include individual as well as corporate". Nonetheless, no detail is given to the public by any one so far.

Staying in US, President Donald Trump praised Chinese efforts regarding North Korea and said Chinese President Xi Jinping would "try very hard" on it. However, on the other hand, Trump launched a probe against exporters of cheap steel, including China, to US. And he emphasized that steel is "critical" to both the economy and military. Meanwhile, Trump’s earlier comments that Korea used to be a part of China infuriated people in South Korea. South Korean foreign ministry spokesman Cho June Hyuck said yesterday that "it’s a clear fact acknowledged by the international community that, for thousands of years of history, Korea has never been part of China." Meanwhile, the Liberal Korea Party presidential candidate Hong Joon Pyso said through a spokesman that Trump’s comment " is clearly a distortion of history and an invasion of the Republic of Korea’s sovereignty."

Dallas Fed president Robert Kaplan said yesterday that "three rate increases this year…is still a good baseline." And, "if the economy develops a little more slowly, then we can do less than that and if the economy is a little stronger, we can do more than that." Regarding unwinding the balance sheet, Kaplan said that "as soon as later this year or maybe early next year, we should begin the process of letting the balance sheet roll off."

On the data front

Japan PMI manufacturing rose to 52.8 in April, up from 52.4 and beat expectation of 52.5. New export jumped to 53.9, up fro 51.9. Output rose to 53.6, up from 53.0. Markit noted that "April’s PMI data signaled continued healthy growth of Japans manufacturing sector, and the latest results were again consistent with production rising at a quarterly rate of around 2 percent."

Eurozone PMIs will be released in European session today while UK retail sales will be featured. Canada will release CPI. US will release PMIs and existing home sales.

EUR/USD Daily Outlook

Daily Pivots: (S1) 1.0688; (P) 1.0733 (R1) 1.0759; More….

A temporary top is in place at 1.0777 in EUR/USD and intraday bias is turned neutral first. With 1.0676 minor support intact another rise is in favor. Above 1.0777 will target 1.0905 and above. But still, choppy rise from 1.0339 is still seen as a correction. Hence, we’ll pay attention to topping signal above 1.0905 again, as we’d expect larger down trend to resume later. On the downside, break of 1.0676 minor support will turn intraday bias back to the downside for 1.0569 instead.

In the bigger picture, as long as 1.1298 key resistance holds, whole down trend from 1.6039 (2008 high) is still expected to continue. Break of 1.0339 low will send EUR/USD through parity to 61.8% projection of 1.3993 to 1.0461 from 1.1298 at 0.9115. However, considering bullish convergence condition in weekly MACD, break of 1.1298 will indicate term reversal. this would also be supported by sustained trading above 55 week EMA.

Economic Indicators Update