Yield curve implications to FX trading

2 month inverted 10Yr-2Yr US treasury Notes Spread to EUR/USD direction shows it provided a divergence signal.

Buying the long end of the US yield curve on the assumption of positive economic growth translated into higher USD demand.

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The whole last 9 months we were in the tight SPX - EUR/USD correlation which was basically a risk taking/aversion trade.

Last 3 weeks since the USD reversed its trend we see the 10Yr-2Yr US treasury Notes Spread widening further and a sharp appreciation of the USD.

Here is a 1 year data 10-2 yr spread has been rising steadily along with the EUR/USD. Seems 3 weeks ago something happened as the EUR/USD trend has bent and spread is still moving higher. on this time frame we can make the 3 possible assumptions:

1. EUR/USD is leading and spread will tighten due to buying of the long end - which will mean deflation/economic problems/.

2. EUR/USD will again converge to the observed trend and is actually trading here at a huge discount.

3. This assumption is that the correlation is broken and USD will be bid on positive US economic prospects and the risk trading theme since March will be removed and give way to fundamental flows into US stock market as inflation fears will emerge and higher performance will be demanded.