Euro Tumbles on Increasing Chance of Early Italian Election, Outlook Stays Bullish Though

Euro tumbles broadly this week as some traders are betting on an early election in Italy, that creates some political uncertainty again. Leaders of major political parties are going to discuss, in the coming weeks, a new electoral law with a proportional system similar to the German model. And it's believed that an agreement is close between the leaders that could pull ahead the elections original scheduled in early 2018. Former Prime Minister and Democratic Party leader Matteo Renzi, who's desperate to seek a come back after the referendum defeat, is pushing for an early election as soon as in September, at the same time as Germany's own election. But ultimately, the move would also require President Sergio Mattarella's decision to dissolve the government. After all, the markets are starting to price in the development.

Technically, EUR/USD failed to take out key resistance at 1.1298 and retreated. Near term outlook, though, stays bullish as long as 1.1020 support holds. EUR/JPY also lost momentum ahead of 126.09 key resistance. But similarly, near term outlook stays bullish as long 121.61 fibonacci level holds. EUR/GBP also lost momentum ahead of 0.8786 resistance but outlook stays mildly bullish as long as 0.8602 minor support holds. Overall, Euro remains the strongest major currency, next to Kiwi, for the month, as boosted by French election results and positive economic data.

ECB Draghi delivered cautious message to European parliament

ECB President Mario Draghi sounded cautious in the hearing in European parliament yesterday. Draghi said policy makers are "firmly convinced" that extraordinary amount of monetary policy support is "still necessary" for the Eurozone. He pointed out that support is needed for reabsorbing present level of "under-utilized resources" and for brining back inflation to 2% target and "durably stabilize" around there. Meanwhile, Draghi expects new staff economic projections at the June monetary policy meeting. ECB would then be able to reassess the risks to outlook for growth and inflation.

Currently, it's expected that the new June staff projections to provide upward revision to growth and inflation forecast, at least for 2017. ECB policies makers would probably start discussing exit of stimulus but there wouldn't be any decision made. Instead, Draghi might hint at an announcement of some sort in the September meeting, in particular as the current asset purchase program will end in December. So, there are still some food to digest for Euro traders in the June meeting.

May and Corbyn take different Brexit negotiation stance

In UK, the focus in the election to take place on June 8 could be starting to narrow to the parties' Brexit negotiation stance while Conservatives' lead over Labour has been narrowing. Prime Minister Theresa May is clear that she's taking a tough stance with the snap election to secure her mandate. And May reiterated that "no deal is better than a bad deal", and, "we have to be prepared to walk out". On the other hand, Labour leader Jeremy Corbyn set out a totally different approach and emphasized that "there's going to be a deal" and "we will make sure there is a deal".

The negotiation is scheduled to start on June 19. Ahead of that, EU's chief Brexit negotiator Michel Barnier urged the European MPs to be vigilant throughout the negotiation. Barnier wanted that once it leaves EU, UK could be "tempted to distance itself from our standards" like consumer projection or financial stability. And, he urged to ensure that this "inevitable divergence" won't become "unfair competition". And he emphasized "full transparency for these negotiations". He reiterated his stance with EU leaders that "sufficient progress" is needed on the issues of the "divorce bill", citizens right and Ireland border arrangements before the talk of a trade deal.

On the data front...

New Zealand building permits dropped -7.6% mom in April. Australia building approvals rose 4.4% mom in April. Japan unemployment rate was unchanged at 2.8% in April, household spending dropped -1.4% yoy, retail sales rose 3.2% yoy. Eurozone confidence indicators, Germany import price and CPI, France GDP will be featured in European session. Swiss will also release KOF leading indicator. In US, session, US personal income and spending, S&P Case-shiller house price and consumer confidence will be featured. Canada will release current account, IPPI and RMPI.

EUR/JPY Daily Outlook

Daily Pivots: (S1) 124.03; (P) 124.33; (R1) 124.48;

Visit technical outlook sections for other pairs.

EUR/JPY drops sharply to as low as 123.24 so far and deeper decline might be seen. But after all, it's staying in the consolidation pattern from 125.80. Hence, we'd expect downside to be contained by by 38.2% retracement of 114.84 to 125.80 at 121.61 to bring rise resumption. We're staying mildly bullish in the cross. And, break of 126.09 key resistance will extend the whole rebound from 109.03 to 100% projection of 109.03 to 124.08 from 114.84 at 129.89. Nonetheless, firm break of 121.61 will dampen our bullish view and bring deeper fall to 61.8% retracement at 119.02.

In the bigger picture, focus is back on 126.09 support turned resistance. Decisive break there will confirm completion of the down trend from 149.76. And in such case, rise from 109.20 is at the same degree and should target 141.04 resistance and above. Meanwhile, rejection from 126.09 and break of 114.84 will extend the fall from 149.76 through 109.20 low.