07.01.202500:37 Forex Analysis & Reviews: EUR/USD: Southern Trend on Pause

The US Dollar Index experienced a sharp decline on Monday, allowing buyers of EUR/USD to test the 1.04 range. Last week, the index had reached a 26-month high of 109.36, but on Monday, it fell to the 107 range. Notably, this significant drop occurred despite a largely empty economic calendar. This unexpected decline seems to have been influenced by developments in China, which alleviated concerns about rumors of a COVID-like virus spreading in the country. Additionally, a positive Caixin-Markit report released on Monday further enhanced risk appetite.

As a result, the US Dollar Index plunged, and EUR/USD tested the 1.0430 resistance level (the middle line of the Bollinger Bands, coinciding with the Kijun-sen line on the D1 timeframe). The southern trend remains intact despite this sharp corrective move after the plunge to the 1.02 range. This correction, while significant, is temporary in nature. Thus, long positions remain risky.

Over the weekend, media reports highlighted concerns about a spreading hMPV virus (metapneumovirus) in China, with symptoms similar to COVID-19 and alleged mortality rates of nearly 40%. Reports also surfaced that this virus had been detected in other countries, fueling fears of another global pandemic.

However, representatives from China's Ministry of Foreign Affairs and the World Health Organization dismissed these claims, stating that metapneumovirus poses no pandemic-level threat. According to China's National Disease Control and Prevention Bureau, the rise in respiratory infections is typical for the season, and total cases remain lower than last year's levels.

In other words, China has "canceled" the new pandemic, though many media outlets ran corresponding headlines over the weekend, stirring panic.

In addition, the Caixin-Markit Services PMI in China came in better than expected. Instead of the forecasted decline to 51.4, the index rose to 52.2, the highest reading since May 2024.

These developments fueled risk appetite, broadly pushing the safe-haven dollar lower.

Macroeconomic reports from the eurozone also supported EUR/USD buyers. For instance, December's services PMI indices were slightly revised upward. The German Services PMI was revised from 51.0 to 51.2, adding to the euro's support.

The PMI indices offered only basic support for the euro. However, the standout report was Germany's inflation data, which exceeded expectations ahead of the eurozone-wide inflation report. The monthly Consumer Price Index (CPI) increased by 0.4% (forecast: 0.3%), while the annual CPI rose to 2.6% (forecast: 2.4%). This marks the third consecutive month of growth in the annual CPI, with December recording the fastest increase since January 2024.

The Harmonized CPI jumped by 0.7% month-over-month (forecast: 0.5%, previous value: -0.7%), the highest growth rate since April 2023. In annual terms, this index climbed to 2.9% (forecast: 2.6%), reaching a multi-month high and marking the strongest growth rate since January 2024.

German inflation data often correlates with the eurozone CPI, and the latest release has further supported the euro.

These factors drove the corrective rise in EUR/USD but lacked the strength to reverse the pair's bearish trend. Despite Monday's impulsive price increase, buyers failed to break through the 1.0430 resistance level (the middle line of Bollinger Bands, coinciding with the Kijun-sen line on the D1 timeframe).

The upcoming labor market reports in the U.S. will be crucial in determining the dollar's direction. On January 7, the Bureau of Labor Statistics will release data on job vacancies and labor turnover. The following day, January 8, the ADP agency will publish its employment report. Finally, on Friday, the December Nonfarm Payrolls report will be released. If these reports support the dollar, the U.S. Dollar Index will likely rebound, pushing the EUR/USD currency pair back to the 1.02 range.

Regarding technique, the EUR/USD pair currently trades between the middle and lower lines of the Bollinger Bands on the daily chart and remains below the Kumo cloud. If the price drops below 1.0340, the Tenkan-sen line, the Ichimoku indicator, will generate a bearish "Parade of Lines" signal. Traders can look for corrective price spikes as opportunities to enter short positions. The first target for this strategy is 1.0340, with a primary target set at 1.0270, aligning with the lower Bollinger Bands line on the daily timeframe.