02.01.202516:05 Forex Analysis & Reviews: EUR/USD: The Dollar Returns from the New Year Holidays

The EUR/USD pair ended 2024 at 1.0354, experiencing an impulsive drop of nearly 100 points on December 31. Today, traders attempted a correction but to no avail: bearish sentiment still prevails for the pair. Therefore, any corrective rebounds should be viewed as an opportunity to open short positions.

Starting today, the market will gradually come back to life. The New Year holidays have ended, statistical agencies are beginning to release the first macroeconomic reports, and traders are returning to their routines. The end of the trading week promises to be quite informative.

The dollar significantly strengthened on the last day of the previous year, even though Tuesday's economic calendar was entirely empty. The safe-haven greenback was in higher demand amid a decline in the U.S. stock market. American stock indices experienced significant losses due to low trading activity in the pre-holiday period. The traditional "Santa Claus rally" (a year-end market boost) did not materialize due to the Federal Reserve's announced slowdown in rate cuts and general nervousness stemming from the upcoming Trump presidency.

The U.S. Dollar Index remains in the 108 figure area, near two-year highs, ahead of key January releases. Tomorrow, Friday, the U.S. will release the ISM Manufacturing Index, a crucial macroeconomic indicator that could trigger strong volatility in the EUR/USD pair. In November, this indicator rose sharply (from 46.5 to 48.4), nearing the critical 50-point level. According to most analysts, the index is expected to continue its upward movement in December but remain in contraction territory, rising to 48.6. If the index unexpectedly exceeds the 50.0 threshold, the dollar will receive significant support.

Meanwhile, the euro faced slight pressure today following the publication of PMI indices. Final December manufacturing PMI estimates showed a slight downward revision for the Eurozone's manufacturing activity index (from 45.2 to 45.1). Although the revision was minor, the fact that the index remains in contraction territory exerted pressure on the single currency. The index has been declining for two consecutive months. Germany's manufacturing PMI matched preliminary estimates at 45.2, still in contraction territory, offering no relief to EUR/USD buyers.

China also added pressure to the EUR/USD pair, publishing its Caixin/Markit manufacturing PMI today. After two months of growth (October and November), the index climbed to 51.5 points. However, contrary to forecasts of 51.7, it dropped sharply to 50.5 in December—just a step away from the critical 50.0 mark.

The weak release from China allowed EUR/USD sellers to regain control of the pair. The price is currently testing the 1.0330 support level (the lower line of the Bollinger Bands on the H4 chart) and may soon test the 1.02 level. The primary target for the downward movement remains parity (1.0000), which is just over 300 points away—a manageable distance given that the pair fell from 1.0576 (December open) to 1.0354 (December close) within the month.

December's Nonfarm Payrolls, due next Friday, could play a pivotal role in initiating another bearish impulse.

Currently, the likelihood of a pause at the Fed's January meeting stands at 90%, according to the CME FedWatch tool. For the March meeting, the odds of a 25-basis-point rate cut are evenly split at 50/50. Strong Nonfarm Payrolls data could tip the scales in favor of a wait-and-see approach for March.

Thus, the overall fundamental backdrop supports further declines in EUR/USD due to the euro's weakness and the dollar's strength. Corrective surges should be viewed as opportunities to open short positions.

Technical indicators agree. On the daily chart, the price is between the middle and lower lines of the Bollinger Bands and below all Ichimoku indicator lines, signaling a bearish "line parade." The first target for the southern movement is 1.0300 (the lower Bollinger Band on the D1 chart). If this target is breached, the next target will be 1.0270 (the lower Bollinger Band on the W1 chart).