COMMENT-EUR/USD bulls still reign but may have to tread cautiously

March 6 (Reuters) - EUR/USD rose above the 61.8% Fibo retracement of the 1.1214-1.0125 drop and struck a fresh 4-month high as bulls continued their charge, but the rally faces risks that investors should take into consideration.

The pair's sharp gains have been driven by Germany's plan for a large spending increase, which drove Europe's yields DE10YT=RR upward and reduced the dollar's yield advantage over the euro as German-U.S. spreads US2DE2=RR hit their tightest since early October.

The spending plan faces hurdles however.

Germany's Greens party has not committed support to the plan while the AfD and Left parties are threatening legal action.

German banks warned Thursday that cutting red tape in Germany would be needed for the spending plans to maximize their impact.

The ECB may also present a risk. The bank cut by 25bps and said monetary policy is becoming meaningfully less restrictive, which led investors take the view that the easing cycle may end.

The ECB statement also said disinflation is well on track, however, and President Lagarde said growth risks remain tilted to the downside and "we have huge uncertainty".

Should Germany's plans fall apart, yield spreads US2DE2=RR and terminal rate spreads between the Fed SRAM26 and ECB FEIZ5 could reverse the recent tightening.

That would threaten to erase EUR/USD's recent rally.