EUR flows: EUR/USD risk premium declines

EUR/USD has fallen back in response to the US/China trade deal, in line with the general USD recovery. But even now, there still looks to be a substantial risk premium in the USD, with the old yield spread relationship suggesting scope down to the 1.05 area. We wouldn’t expect a move of that size, as some risk premium is still likely to remain with the Trump approach having dented confidence in the stability of US policy and potential for Trump to indicate a preference for a lower USD as well. But there is certainly scope for a larger correction to 1.10, and potentially as low as 1.07. For now, risks remain on the downside, although if there is progress in Ukraine peace talks the EUR may get some support.