EUR/USD slipped on Monday, but investors holding long positions in the pair are likely to remain confident ahead of key U.S. inflation data due later this week.

This dip follows Friday's move, when the pair completed the consolidation phase of its advance from the July 28 low by rallying to a 1-1/2 month high. Even with Monday's pullback, the pair holds just below that high, a sign that bulls remain confident.

Additional support for bullish sentiment comes from yield differentials and inflation-rate markets. The dollar's yield advantage over the euro eroded further on Monday as U.S.-German 2-year yield spreads narrowed. Importantly, the spread remains above key support near -155 bps, which could help limit EUR/USD's downside if it continues to hold. Further encouragement comes from U.S. 2-year and 5-year

inflation breakeven rates, which hit fresh lows over the last two weeks in their decline from May peaks.

Attention now turns to the U.S. July CPI and PPI reports, due on Wednesday and Thursday, respectively. The data will likely need to come in above expectations for EUR/USD bulls to lose confidence.

Conversely, results that come in as expected or below forecasts are likely to send the dollar and Treasury yields lower as investors price in a reduced probability of Fed rate hikes. Should that scenario play out, EUR/USD would likely resume its rally from the July 28 low, reinforcing the pair's broader upward trajectory.
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(Christopher Romano is a Reuters market analyst. The views expressed are his own)