EUR/USD: Driven by risk & 10-yr German/US yield spread but...

Pay attention to the short/long-dated German vs US yield spreads, the risk environment, and the Italian vs German premium as the key drivers to gauge the next capital flows. For now, risk and the narrowing of the 10y spread rules price action, but a source of concern is Italy and 2-yr yield spreads, exhibiting a major divergence with the direction of EUR/USD. The recent acceleration of EUR gains may be partly explained by the change in market dynamics after a reignition of risk appetite, resulting in large numbers of market participants caught wrong-sided, judging by the overly bearish commitment by large specs based on recent CoT reports.