BUZZ-COMMENT-EUR/USD's downside is not guaranteed

Feb 19 (Reuters) - EUR/USD struck a four session low on Wednesday with help from softer risk sentiment, but yields, inflation expectations, and technical influences could help underpin the pair.

German-U.S. 2-year yield spreads, which EUR/USD is correlated with, traded at their tightest since January 31.

The tightening appears to be driven by the European side of the equation.

Yields are firming on the prospect of an end to the Russia-Ukraine war which could drive higher defense spending by Europe.

Increased spending could fuel inflation in Europe and lead the ECB to rethink its current rate cutting cycle. In fact, ECB board member Schnabel said Wednesday the central bank is getting closer to where the bank may have to pause, or halt, cuts.

U.S. inflation 2-year break evens USBEI2Y=RR could become a weight on the dollar. Break evens rallied and neared structural resistance just below 3.2% on February 12, but have pulled back sharply. A further erosion of gains off the September low could weigh down the dollar, and in turn prop up EUR/USD.

Meanwhile, technicals continue to highlight upside risks.

Daily charts show a potential head and shoulders bottom forming. With this, a rising monthly RSI, and, as stands, a hammer candle on the monthly chart, reinforce bullish signals.

Should spreads tighten further, and break evens extend their slide, EUR/USD may clear hurdles near 1.0535 and 1.0630 then make a run toward 1.0800/25 and 1.0940/50.

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