EUR/USD is currently on a downward trend, pulling back from its pre-Christmas highs in a session with low trading volumes. The currency pair is hovering around 1.1760 after reaching just above 1.1800 last week. This shift is driven by the strengthening of the US Dollar and ongoing geopolitical tensions between China and Taiwan. A recent meeting between US President Trump and Ukrainian President Zelenskyy has sparked hopes for peace in Ukraine, giving some support to the Euro. At the same time, speculation about the Federal Reserve potentially cutting interest rates next year is impacting the recovery of the US Dollar. Investors are closely watching the minutes from the Fed’s December meeting.

Economic Performance and Geopolitical Tensions

Increasing tensions from Chinese military exercises near Taiwan have heightened demand for the US Dollar as a safe investment. Economic data reveals that US Pending Home Sales for November are expected to rise by 1%. Additionally, the GDP for the third quarter surpassed estimates, showing a growth of 4.3% annually. Technically, EUR/USD is nearing support at 1.1755, where bearish traders see opportunities. Resistance is found around the 1.1805 level, with more bullish challenges at 1.1820. The Euro is influenced by key economic indicators, including GDP and trade balance figures. As of December 29, 2025, EUR/USD is retreating during this quiet holiday trading period. The downturn is influenced by short-term demand for the US Dollar due to rising military activities by China near Taiwan. This situation could lead to increased short-term volatility, even in low trading volume periods. For derivative traders, this creates an opportunity to prepare for possible price fluctuations in early January. According to Cboe’s EuroCurrency Volatility Index (EVZ), which typically rises during uncertain times, there has been a slight increase. This suggests that option premiums may become more expensive. Traders might consider buying near-term put options with a strike price below 1.1755 to hedge against or capitalize on further declines driven by geopolitical tensions.

Central Banks and Market Strategy

However, the broader context is shaped by differing central bank policies. The Federal Reserve has cut rates this month and indicated more reductions are likely in 2026. This weakening long-term appeal of the US Dollar is confirmed by recent data from the CME FedWatch Tool, showing an 85% probability of at least two rate cuts in 2026. In contrast, the European Central Bank remains firm, with core inflation stable at 2.7% in November 2025. This economic backdrop supports a positive outlook for EUR/USD once holiday trading comes to an end and attention shifts back to monetary policy. A possible strategy for the upcoming weeks could be to sell out-of-the-money puts expiring in late January, taking advantage of premium collection based on the expectation that the 1.1700 level will serve as solid support. Alternatively, buying long-dated call options with a strike price above 1.1820 would position traders for a likely resumption of US Dollar weakness in the new year. We should exercise caution ahead of this week’s release of the Fed’s December meeting minutes. Any less dovish statements than expected could trigger a sharp, though temporary, rally in the US Dollar. Therefore, utilizing options strategies such as strangles or straddles might be wise, allowing traders to profit from significant price movements in either direction while managing risk effectively. Create your live VT Markets account and start trading now.

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