BUZZ-COMMENT-Further EUR/USD downside will need a push from US data

Jan 3 (Reuters) - EUR/USD rallied Friday to recover some of Thursday's sharp fall but remains near its 26-month low as investors are positioned for further downside, though there is a risk they get squeezed hard if U.S. data releases next week don't cooperate.

In a counter-intuitive move EUR/USD fell just over 2.7% in the Dec. 18 to Jan. 2 period despite German-U.S. 2-year tightening from -231bps to -210bps as the dollar's yield advantage over the euro deteriorated over the same time frame.

A slew of U.S. employment data will be released next week. The December U.S. payroll and ADP reports are due as are November JOLTS and weekly and continuing claims.

University of Michigan's January consumer survey of 1-year and 5-year inflation outlooks are also due.

Should the data indicate slower jobs growth and inflation expectations are dropping the U.S. interest rate complex may soften as investors price in deeper rate cuts from the Fed for the current cycle SRAM26.

The dollar's yield advantage over the euro may extend its recent deterioration, which could drive EUR/USD buying.

The latest CFTC data showed the net-short euro position has once again increased back near the extremes struck in mid-December, which was the biggest short since early 2020.

EUR/USD downside, therefore, appears priced in, so a weaker outcome in U.S. jobs and inflation data could potentially drive EUR/USD higher if it forces investors to hedge their bets.

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

((christopher.romano@thomsonreuters.com;))