• EUR/USD edges higher for the second straight day and draws support from a softer USD.
• The narrowing of the German yield curve inversion lends support to the Euro and the pair.
• Hawkish Fed expectations might limit the USD slide and keep a lid on any further gains.
• Traders might also prefer to wait on the sidelines ahead of the Jackson Hole Symposium.

The EUR/USD pair gains some positive traction for the second successive day on Tuesday and climbs back above the 1.0900 mark during the Asian session. Spot prices currently trade near a three-day top and look to build on the recent bounce from over a two-month trough, around the 1.0845 region touched last Friday.

The European Central Bank (ECB) Chief Economist Philip Lane said on Friday the Euro Zone economy would keep growing and is unlikely to experience a deep or sustained recession. This leads to the narrowing of the German yield curve inversion and supports prospects for further policy tightening by the ECB, which is seen underpinning the shared currency. Apart from this, a modest US Dollar (USD) weakness turns out to be another factor acting as a tailwind for the EUR/USD pair.

In fact, the USD Index (DXY), which tracks the Greenback against a basket of currencies, remains depressed below its highest level since July 12 as traders are still betting on the idea that the Federal Reserve (Fed) will pause its rate-hiking cycle in September. That said, the incoming US economic data continues to point to an extremely resilient economy and keeps the door open for one more 25 bps lift-off by the end of this year, which should help limit any meaningful USD losses.

The view that the Fed will keep interest rates higher for longer remains supportive of elevated US Treasury bond yields. It is worth recalling that the yield on the benchmark 10-year US government bond had climbed to a fresh 15-year top on Monday. Apart from this, a generally weaker risk tone assists the safe-haven USD to hold just above a technically significant 200-day Simple Moving Average (USD). This might hold back bulls from placing aggressive bets around the EUR/USD pair.

Investors might also prefer to move to the sidelines ahead of Fed Chair Jerome Powell and ECB President Christine Lagarde’s speech at the Jackson Hole Symposium later this week. Investors will further take cues from the flash version of the PMI prints from the Euro Zone and the US, due on Wednesday, which will provide fresh insights into the economic health and whether the respective central banks can afford to increase interest rates further.

In the meantime, traders on Tuesday will take cues from the release of the Euro Zone Current Account figures, which will be followed by Existing Home Sale and Richmond Manufacturing Index later during the early North American session from the US. This, along with the US bond yields and the broader risk sentiment, will influence the USD price dynamics and produce short-term trading opportunities around the EUR/USD pair.

Technical levels to watch

EUR/USD