To quantify the impact that a decline-or even an elimination-of the risk premium could have on EUR/$, we re-estimate our model without our proxy for the Eurozone risk premium. In the absence of this factor, EUR/$ would be trading around 1.38 currently. Relative to our fitted value, which includes periphery CDS spreads, this suggests that the Euro-zone risk premium could currently amount to as much as 12 big figures. This underscores the potential for further EUR/$ strength as the cumulative effect of recent and prospective policy measures takes hold. On a 6- to 12-month horizon, we therefore see a substantial reduction in the Euro-zone risk premium as a key element of our EUR/$ forecast of 1.35 and 1.38, respectively.

Eoin Treacy's view The Euro Trade Weighted Index experienced an abrupt decline from mid March until late June. By that time sentiment had deteriorated to such an extent that forecasts of US Dollar parity were not uncommon, but from a technical perspective the currency had become deeply oversold.

The Index found support above 120 from early June and broke the progression of lower rally highs in early July. It continues to rally in what has the appearance of a relief rally towards the mean. The most likely scenario is that the Euro has hit at least a medium-term peak and the uncertainty lies in how long the topping out process is likely to take.

Against the US Dollar the Euro found support near $1.20 from early June and bounced by 10¢. It is now testing the psychological $1.30 but a sustained move below $1.25 would be required to question the consistency of the six-week advance.