EUR/USD dropped to a two-month low on Tuesday, with a combination of yield spreads, options positioning, and technical indicators all pointing toward increasing downside risks for the pair.

On the yield front, the dollar's advantage over the euro has widened, as U.S.-German 2-year yield spreads reached their broadest level since July 10. This widening may be tied to the recent decline in oil prices, which could push the ECB toward a less hawkish stance and away from further rate hikes.

Options markets are also positioning for further euro weakness. EUR/USD's 1-month and 3-month risk reversals show that volatility premiums for euro puts are higher than those for euro calls, signaling hedging demand against additional downside.

Technical indicators reinforce the bearish picture. Daily and monthly RSIs show downward momentum is intact, with neither indicator suggesting oversold conditions yet. The pair continues to consolidate its decline from the September 9 high, and its hold below the 61.8% Fibonacci retracement of the 1.1325-1.1711 rally adds to the negative tone.

EUR/USD trading beneath its downward-sloping 10-, 21-, 55-, and 200-day moving averages further supports the bearish case. Additionally, a new signal has emerged from the 15-month Bollinger bands, which are widening and sloping downward, indicating rising volatility and momentum behind the move.

If these conditions persist, EUR/USD could test the June monthly low of 1.1325, and a break below that level would open the door to steeper losses.
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(Christopher Romano is a Reuters market analyst. The views expressed are his own)