EUR/USD - Focus on US inflation and yield differential

• The EUR/USD rally has stalled, so yield differential could come into play.
• An above-forecast US CPI may send risk assets lower, EUR to feel the heat as well, but may outperform other majors.

Traditional FX market correlations like yield differential and exchange rate broke down in the fourth quarter of 2017. Coming into 2017, EUR/USD was solidly bid, despite widening US-DE (German) two-year and 10-year yield spread.

However, the rate differential will likely come into play, given the euphoric rally in EUR/USD seems to have stalled. Since early Feb, the spot has been trading 1.21-1.25 range.

As of writing, the spot is trading at 1.2335 and the 2-year US-German yield spread stands at a record high of 285 basis points (bps).

The spread may rise further in the USD-positive manner if the US February CPI (due at 12:30 GMT) beats estimates. In this case, the EUR/USD could drop below 1.2298, adding credence to Friday's bearish outside day candle.

That said, the common currency could still outperform other majors as the hotter-than-expected US CPI will likely push yields higher and equities lower.

On the other hand, a weaker-than-expected US inflation figure will likely yield broad-based losses in the greenback.

EUR/USD Technical Levels

A break below ascending 50-day moving average (MA) of 1.2284 would shift attention to 1.2206 (Feb. 9 low). A close lower would signal a bullish-to-bearish trend change and could yield a drop to 1.2035 (100-day MA).

On the higher side, a close above 1.2446 (March 8 high) would signal a continuation of the rally from the March 1 low of 1.2154 and allow a stronger rally to 1.25 (psychological hurdle) and 1.2556 (Feb. 16 high).