"After Tuesday’s Treasury flash crash, US bond yields looked to have put in blow-out base that should help the long USD/JPY m/t outlook. In addition, the new EUR/USD ‘smile curve’ shows only a limited terrain where the EUR outperforms the USD. Under most risk scenarios the USD outperforms the EUR with the exception of the recent tendency where the scaling back of Fed expectations trumps the wait for ECB QE, and longer-term EUR secular stagnation concerns.
...If US data comes in stronger than recent fears as DB expects, the Fed tightening expectations will quickly come back on the table at least in the out years (2016 and beyond), and with it the big ECB – Fed divergence story. If risk is in a more friendly phase the EUR (and JPY) will be favored as funders.
Unfortunately for the EUR, the dramatic squeeze in Euro$ shorts has already happened, and the bulk of any trimming in Fed rate hike expectations has already occurred. The feedback loop of a strong USD impacting policy through disinflation has come through quicker than expected, which may slow, but not stop the USD uptrend."