Feb 7 (Reuters) - EUR/USD rallied slightly Wednesday with help from German-U.S. yield spreads, but the pair remains range-bound with the Feb. 13 U.S. CPI report the next big potential catalyst for a breakout and support in the 1.0700/25 area in focus.
Estimates for January headline CPI are +0.2% versus prior +0.3% while core CPI is estimated at +0.3%, which would match the prior result.
Recent U.S. data has fueled some concerns that inflation may begin rising again, so above-forecast CPI has the potential to spark sharp gains for U.S. yields, which would pull the dollar higher as investors would likely reduce bets on Fed rate cuts in the first half of 2024.
An above-forecast print could fuel a breakout of U.S. 2-year yields US2YT=RR beyond the upper end of the 4.10%-4.50% range, which has been in place since mid-December, increasing the dollar's yield advantage over the euro and driving German-U.S. 2-year spreads US2DE2=RR towards 2023 wides near -204bps.
That could lead EUR/USD to a break of support in the 1.0700/25 area, with shorts likely to target support near 1.0500 afterward.
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(Christopher Romano is a Reuters market analyst. The views expressed are his own)
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.