Jan 14 (Reuters) - EUR/USD rallied Tuesday after U.S. December PPI indicated prices increased less that estimated but bigger gains for the pair are unlikely unless prevailing trends in inflation expectations and yields reverse.
Investors' inflation expectations continue to trend upward. U.S. 2-year
and 5-year rallied to levels not seen since March 2023 after recently breaking above key resistances.
The U.S. Treasury 10-year yield is consolidating gains from the rally off the 2020 yearly low and is near key 5.0%-5.5% resistance which may be the last impediment ahead of much bigger yield gains should it break.
For those trends to reverse, more data indicating prices are rising more slowly than expected and that economic growth is slowing will be needed.
U.S. December CPI and retail sales are now in focus. Inflation expectations and yields could tumble should the data indicate disinflation is back and consumer spending is slowing.
The dollar's yield advantage may dwindle in that scenario as German-U.S. spreads and terminal rate spreads for the Fed and ECB could sharply tighten.
EUR/USD shorts may get squeezed and bulls may gain the confidence to charge ahead.
Upbeat CPI and sales reports could widen spreads and send EUR/USD below
parity.
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(Christopher Romano is a Reuters market analyst. The views expressed are his own)