June 20 (Reuters) - The EUR/USD rally is stalling with very little advance seen in the past two months, heightening the appeal of carry trades

The carry isn't huge at roughly 0.5% for the past two months but with little FX risk it is a factor that traders should consider.

While techs remains supportive of this year's rise, there has been a clear slowdown and the pair remains fairly overbought, so unless there is dramatic news to reinvigorate the rally, a slow, and perhaps negligible rise may unfold.

There could be a further slowing in activity over the European summer as traders take a break, and should they bank profits the unwinding of a now substantial $13 billion wager on a rise will provide resistance.

No changes in interest rates are seen from the Federal Reserve, or European Central Bank before October. Futures imply one U.S. rate cut of 25 bps by October, and perhaps no further change in the euro zone interest rate in the remainder of this year.

Stocks are buoyant, which will support riskier investments like those which depend upon interest rates. If the main risk for all markets - conflict in the Middle East - intensifies, the dollar could rise significantly.

Although a carry trade is not intended to benefit from a favourable move in the direction of currencies, a EUR/USD short is an effective way to hedge the risk of a bigger war, and those who hold them will be paid while they wait to see what happens.
EURUSD and forward swap

(Jeremy Boulton is a Reuters market analyst. The views expressed are his own)