EUR/USD experienced a downward trend, retreating from its pre-Christmas highs in a session marked by reduced trading volumes. The pair traded near 1.1760 after peaking just above 1.1800 last week, influenced by US Dollar strength and geopolitical tensions involving China and Taiwan.
A meeting between US President Trump and Ukrainian President Zelenskyy has led to hopes of a peace deal in Ukraine, offering some support to the Euro. Meanwhile, the possibility of the Federal Reserve cutting interest rates in the coming year is affecting the US Dollar’s recovery, with market attention on the Fed’s December meeting minutes.
Economic Performance and Geopolitical Tensions
Escalating tensions with Chinese military exercises around Taiwan have fuelled demand for the US Dollar as a safe haven. In economic data, US Pending Home Sales for November are anticipated to increase by 1%, while GDP for the third quarter exceeded expectations at 4.3% annualised growth.
Technically, EUR/USD approaches support at 1.1755, with bears finding potential footholds. Resistance lies near the 1.1805 mark, with further bullish challenges at 1.1820. The Euro remains a major currency, driven by economic indicators such as GDP and trade balance figures.
Given that today is December 29, 2025, we are seeing EUR/USD pull back during this thin holiday trading period. The pair is reacting to short-term safe-haven demand for the US Dollar, driven by escalating military drills by China around Taiwan. This creates an environment where short-term volatility could increase, even on low volume.
For derivative traders, this suggests an opportunity to position for potential price swings in early January. Looking at Cboe’s EuroCurrency Volatility Index (EVZ), which historically rises during periods of uncertainty, we’ve seen a slight uptick, signaling that options premiums may become more expensive. Traders could consider buying near-term put options with a strike below the 1.1755 support level to hedge against or profit from a further slide driven by geopolitical risks.
Central Banks and Market Strategy
However, the bigger picture remains dominated by central bank policy divergence. With the Federal Reserve having cut rates this month and signaling more to come in 2026, the US Dollar’s long-term appeal is weakening. The latest data from the CME FedWatch Tool reinforces this, showing markets are pricing in an 85% probability of at least two rate cuts in 2026, a stark contrast to the European Central Bank which is holding firm due to core inflation that remained sticky at 2.7% in November 2025.
This fundamental backdrop supports a bullish outlook for EUR/USD once holiday trading ends and focus returns to monetary policy. A strategy for the coming weeks could involve selling out-of-the-money puts with an expiry in late January, collecting premium on the belief that the 1.1700 level will hold as strong support. Alternatively, buying long-dated call options with a strike price above 1.1820 would position for the expected trend of US Dollar weakness to resume in the new year.
We must remain cautious ahead of the release of the Fed’s December meeting minutes this week. Any language that is less dovish than anticipated could cause a sharp, albeit temporary, rally in the US Dollar. Therefore, using options strategies like strangles or straddles could be a prudent way to trade the event itself, profiting from a large price move in either direction while maintaining a defined risk profile.
