EUR/USD. The pair under bearish control: is it worth entering short positions?

[Ben Graham]

The euro–dollar pair continues to trade within the 17th figure, showing contradictory price action inside the 1.1700–1.1800 level. During Thursday's Asian session, the pair surged sharply to 1.1766, reacting to fairly strong PMI growth data from China. However, at the start of the European session the pair reversed and fell just as sharply, updating the intraday low. In just a few hours, EUR/USD buyers lost all the ground they had gained.

That said, to confirm a downward trend, sellers need not only to break the intermediate support level at 1.1720 (the middle line of the Bollinger Bands indicator on the daily chart), but also to overcome the key price barrier at 1.1690 (the upper boundary of the Kumo cloud on the same timeframe). Only after the bears establish themselves below that level can one speak of the first signs of a trend reversal.

For the third consecutive week, the pair has been trading within the 17th figure, alternately bouncing off the boundaries of the aforementioned price channel. Market participants react impulsively to macroeconomic reports and other fundamental events, but as prices approach the edges of the range they take profits, thereby damping both upward and downward impulses.

Today's EUR/USD price action is a clear illustration of this behavior. Traders responded positively to the PMI reports released in China on the last day of 2025. The data came out in the green zone, which temporarily increased interest in risk assets on the market — including the euro.

Specifically, China's manufacturing PMI rose in December to 50.1, while most analysts had expected a reading of 49.4. First, the index has been rising for a second consecutive month, reflecting positive trends. Second, for the first time since March 2025, the indicator entered expansion territory, surpassing the key 50-point mark. Sub-indices also showed positive dynamics: for example, the production index rose to 51.7 (indicating a significant increase in activity), while the new orders index reached 50.8 (reflecting support for demand). On the other hand, sectoral unevenness remains evident. PMI growth was observed mainly among large companies, while small and medium-sized enterprises continue to face difficulties (especially small businesses). This may reflect easier access for large firms to credit, orders, and government support.

Nevertheless, the fact remains: China's PMI has crossed the critical 50-point threshold for the first time in many months, indicating that the country's manufacturing sector has begun to slow its decline and move into moderate growth.

Positive dynamics were also seen in the non-manufacturing activity index. In December, the indicator rose to 50.2 (versus a forecast of 49.8), after an unexpected drop into contraction territory in November. Notably, the main driver of activity growth was the construction sector — the business activity sub-index in this industry stood at 52.8. The services sector, however, lagged behind: the services business activity sub-index came in at 49.7 in December — still below the key 50.0 mark, though higher than the November reading.

Overall, December PMI data suggest that China's economy has reached a plateau and has begun a cautious recovery. However, it is still too early to talk about full-fledged and sustainable growth — the first months of the current year will be crucial for confirming the trend. The balance will either tilt toward the 50-point territory or slip back into contraction.

This mixed outcome provided only temporary support to EUR/USD buyers. By and large, today is the first full working day of the new year (although it is also the last trading day of the week), so traders are essentially re-evaluating releases that were published before the holidays.

For example, the minutes of the December Federal Reserve meeting turned out to be surprisingly hawkish. First, the document showed that Committee members remain deeply divided over the future course of monetary policy: some believe it is possible to continue easing if inflation keeps slowing, while others favor a pause in order to better assess the effects of steps already taken. Second, some of those who voted for a rate cut stated that the decision was made "on the margin" — under slightly different circumstances, they could have supported keeping rates unchanged.

In other words, the minutes reflected a cautious tone and emphasized the data-dependent nature of the central bank's future actions. After the publication of the minutes, dovish market expectations weakened: the probability of a rate cut at the January FOMC meeting now stands at 14%, and at the March meeting at 46%.

Still, despite the bearish sentiment currently dominating EUR/USD, entering short positions makes sense only if sellers confidently break below the 1.1690 support level (the upper boundary of the Kumo cloud on the daily chart). If the downward impulse fades in this price area, long positions will once again become relevant — with the first (and so far only) target at 1.1760 (the Tenkan-sen line on the daily chart).

The material has been provided by InstaForex Company - www.instaforex.com