China's increase in the FX reserve-requirement ratio could provide a timely catalyst for a recovery in EUR/USD, arriving as the pair reaches an important technical zone while positioning has become increasingly one-sided.

The move to curb yuan appreciation comes soon after EUR/USD met 1.1105, the midpoint of the prior 1.0125–1.2084 advance seen between February 2025 and January 2026, before rebounding to 1.1237. Holding above that midpoint would strengthen the case that the decline was a correction rather than the start of a broader reversal.

Traders who were long roughly €24 billion in January were short approximately €18 billion when EUR/USD based. That dramatic positioning reversal heightens the chance that the correction is ending and that the broader uptrend from 1.0125 can resume. With speculative euro shorts now substantial, a sustained recovery could force bearish investors to cover positions, adding momentum to any rally.

A yuan peak would materially raise that risk. The yuan's advance against China's FX basket began near 95.35 in January and reached 103.77 in October, prompting policymakers to act against excessive appreciation. A softer yuan could trigger short-covering among speculators holding USD/CNY shorts — one of the relatively large bearish-dollar wagers across FX markets — and reduce a key macro force that has coincided with EUR/USD weakness.

An FX RRR hike can be effective because it requires banks to place a larger share of foreign-currency deposits in reserve at the PBOC. This reduces readily available FX liquidity, potentially raises the cost of transactions that reinforce yuan appreciation, and affects dollar funding, swap-market conditions, and incentives to sell foreign currency for yuan.

Unlike conspicuous spot-market intervention, the FX RRR operates through liquidity, incentives, and signalling. It indicates that policymakers are uncomfortable with the pace of CNY gains without declaring an explicit exchange-rate target. That signal alone can discourage investors from continuing to chase yuan appreciation.

Should a yuan peak help cement a base for EUR/USD and unleash short covering, the recovery could eventually challenge 1.2084. A decisive break above that former high would shift attention to Fibonacci objectives at 1.2315, 1.2645, and 1.3064.
EURUSD targets


CNY vs FX basket and eurusd

(Jeremy Boulton is a Reuters market analyst. The views expressed are his own)