April 8 (Reuters) - Traders looking for EUR/USD upside beware, yield spreads might be a threat. Since April 3, German-U.S. 2-year spreads -- which are closely correlated with EUR/USD -- have widened in the dollar's favor, and good portion of that move is due to the rally in U.S. Treasury 2-year yields . That rise in U.S. yields extended across the curve on Tuesday -- contributing to EUR/USD's pullback from the better part of the day's gains -- with 2-year rates rebounding more than 40bps from Monday's 2-1/2-year low. The German-U.S. spread is now threatening the -194bps/-195bps area, which has been support since March 3 and a break of which would increase downward pressure on EUR/USD. If global tariff tensions ease, investors are likely turn their attention to U.S. March CPI and PPI reports due later this week for indications of EUR/USD direction. Upside surprises would increase hawkish expectations of the Fed in markets, potentially causing terminal rate spreads for the U.S. central bank and ECB to widen in the dollar's favor. Such an outcome could increase downward pressure on EUR/USD and possibly lead the market to erase the rally off the March 27 low and test the 200-DMA.
deus


us2yr

(Christopher Romano is a Reuters market analyst. The views expressed are his own)