While price action and sentiment appears favourable to the euro overall, a fully priced-in ECB hike could leave it vulnerable to another dip over the near term. The bigger focus will be on the ECB’s inflation projections and guidance, particularly whether rising energy costs are seen as temporary or a reason to keep tightening later this year. While technicals point to further downside risk near term, futures positioning still supports the broader bullish euro trend.
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ECB Inflation Outlook Takes Centre Stage
The ECB is fully expected to hike its deposit facility rate by 25bp to 2.5% on Thursday, with all 65 economists polled by Reuters in agreement and markets having effectively priced in the move. Therefore, the decision itself is unlikely to be the main event unless the ECB shocks with a surprise hold. Its economic outlook and tone will be paramount in shaping future policy expectations.
Traders will be looking for signs that the ECB still sees the latest rise in inflation as largely an energy-driven shock, or whether it is becoming more concerned about second-round effects that could justify further tightening later this year.
With crude oil rising again as Middle East tensions escalate, the key issue is whether policymakers treat the latest energy shock as another temporary disruption or the beginning of a more persistent inflation trend. That puts the ECB's inflation projections under the microscope, as any changes to its 2026 and 2027 forecasts could provide the clearest guide to whether policymakers see inflation remaining above target for longer.
Source: Eurostat
Recent inflation data was slightly nuanced. While headline CPI accelerated on the back of surging energy prices, core and services inflation eased. The ECB therefore has some wriggle room to argue that underlying inflation has not accelerated, although policymakers will of course be mindful of rising energy costs.
Given the ECB's tendency to avoid committing too far in advance, the most realistic base case is a hike accompanied by cautious, data-dependent guidance rather than a firm signal that another increase is coming.
EUR/USD Risks a Sell-the-Fact Pullback
That could leave the euro vulnerable to a mild sell-the-fact reaction if traders were hoping for a more explicitly hawkish message. EUR/USD could therefore retrace further in the near term following its recent rally.
However, unless the ECB meaningfully pushes back against further tightening expectations, the broader relative-rate backdrop should remain supportive for the euro. As discussed below, I still suspect EUR/USD can eventually break to fresh highs against the US dollar.
EUR/USD Technical Analysis: Euro vs US Dollar
EUR/USD Futures Positioning Supports the Broader Bullish Trend
Futures market exposure looks supportive for euro bulls overall, though price action and sentiment among futures traders hint at weakness over the near term.
Price action shows a strong rally from the June low, although a weekly dark cloud cover pattern suggests a pullback is underway. Still, asset managers remain net long and large speculators are close to returning to net-long exposure. But perhaps the biggest clue for bulls is that total open interest is rising alongside prices, signalling demand within a bullish trend. Gross longs are also curling higher, while shorts have fallen in recent weeks.
So for now, my base case is that EUR/USD has the potential to extend its correction lower. But like gold, I suspect dip buyers are waiting at lower levels, and the euro could still finish the year higher from current levels.
Source: ICE, TradingView
EUR/USD Pullback Could Extend Before Bulls Return
The close-up on the weekly chart better shows the two-week reversal pattern (dark cloud cover). While it warns of a pullback, the four-week rally and bullish range-expansion candle from the 200-week EMA are strong enough for me to suspect that, for now, this is just a retracement rather than a trend-reversal signal.
Note that prices are currently stuck between the 200-day SMA and 200-day EMA, which is a further clue of choppy price action over the foreseeable future. And as the euro has only seen one clean move lower, while recent price action has presented lots of overlapping candles, I suspect EUR/USD is within wave ‘b’ of a classic ABC correction lower.
My near-term bias is therefore for a pullback towards the August VPOC (1.15366), 1.15 handle and July high before bulls can step back in and target 1.18.
Source: ICE, TradingView
