March 12 (Reuters) - EUR/USD traded lower Wednesday despite inflation data that could give the Fed reason to cut deeper than expected as investors may lean more on pricing impacts from U.S. tariff policy. Inflation is moving towards the Fed's 2.0% target as indicated by headline and core February CPI surprising to the downside.

U.S. yields and the dollar fell on the report but the losses were quickly reversed. Yields and the dollar turned positive and hit fresh session highs while German-U.S. spreads widened to increase the dollar's yield advantage over the euro. Terminal rate spreads for the Fed and ECB also widening in the dollar's favor as investors lean towards tariffs leading to rising prices down the line. The Fed is likely to acknowledge inflation's move towards target but could also point to upside risks due to tariff impacts.

EUR/USD likely has to consolidate the gains made on expectations Germany will increase spending before the rally resumes. Should President Trump intensify the tariff war EUR/USD may erase the pair's recent gains on higher probabilities the Fed might not cut at all and possibly consider hiking rates. Should tariff risks abate EUR/USD could rally through 1.0950/60 resistance and make a run at 2024's yearly high.
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(Christopher Romano is a Reuters market analyst. The views expressed are his own)