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  • EUR/USD looks south as the German yield curve is at its flattest since 2008.
  • German recession fears could bolster the dovish ECB expectations, leading to a deeper drop in the common currency.

EUR/USD is on the defensive, having charted a bearish lower high above 1.12 in the last few days and could see a deeper drop to 1.10 in the short-term on rising German recession fears.

German yield curve narrows

The spread between the German 10- and two-year Bund yields narrowed to 22 basis points on Tuesday, the lowest level since 2008. More importantly, the spread has dropped more than 60 basis points this year.

The relentless flattening of the yield curve to the levels last seen in 2008 indicates the recession fears are rising and investors are losing hope of a sustained rise in inflation and growth.  

The markets, therefore, may continue to price in the prospects of an aggressive easing by the European Central Bank (ECB), leading to a broad-based decline in the EUR. The central bank is expected to cut rates further into the negative territory in September.  

Indeed, the US bond markets are also witnessing an inverting yield curve for the first time since 2007. Even so, the US Dollar may find takers due to the safe-haven appeal of the treasuries.

Also, the bid tone around the USD may strengthen if the retail sales for July and the unit labor costs number for the second quarter scheduled for release at 12:30 GMT, blows past expectations.  

As of writing, EUR/USD is trading at 1.1148, having hit a low of 1.1133 in the Asian session.  

 

Technical levels