ECB Meeting Preview: EUR/USD Bears Face a Sentiment Test

ECB Meeting: What Traders Need to Know

• Rates on hold: The ECB is widely expected to hold at 2.5%, with a 25bp December hike the economist consensus.
• Inflation pressures: Euro-area inflation has accelerated to 3.8%, with German state CPI also pointing higher.
• Limited forward guidance: Lagarde may keep December tightening on the table but avoid committing to further hikes in 2027.
• EUR/USD positioning extreme: Record euro gross shorts and support above the May low raise the potential for a short squeeze.
• Fed–ECB divergence: A less-hawkish Fed or more-hawkish ECB could support EUR/USD, particularly if both surprise in the euro's favour.

ECB Expected to Hold Rates, With December Hike in Focus

The European Central Bank (ECB) is widely expected to hold its deposit rate at 2.5% on Thursday, despite euro-area inflation accelerating to 3.8% in September. According to a Reuters poll, 70 of 73 economists expect rates to remain unchanged, while 64 anticipate a 25bp hike in December. Markets are also pricing further tightening into 2027, although I suspect Lagarde will be reluctant to offer much forward guidance beyond keeping December firmly on the table. The ECB has historically been wary of committing to a particular policy path, and with no updated economic projections until December, Thursday's meeting could be more about acknowledging inflation risks than signalling an extended tightening cycle.

ECB Projections Highlight Persistent Inflation Pressures

There are certainly reasons for the ECB to remain hawkish. Inflation has accelerated across all 16 German states, suggesting price pressures are geographically widespread. The ECB's September projections also revised core inflation and 2027 GDP growth higher compared with June, while unemployment expectations edged lower. Although headline inflation is expected to ease towards 2% during 2027, the higher core inflation outlook suggests underlying pressures could remain stubborn. Market-derived short- and long-term interest rate assumptions were also revised higher, reflecting expectations of tighter financial conditions. However, with energy still a major driver of headline inflation, the ECB may prefer to assess incoming data before committing to further tightening beyond December.

Note that ECB staff economic projections are not updated until their December 17 meeting

Record Euro Shorts Raise the Potential for a EUR/USD Rebound

For EUR/USD traders, positioning could make the reaction particularly interesting. Gross-short exposure among large speculators has reached another record high, yet EUR/USD continues to hold above its May low. That raises the possibility of a sentiment extreme and leaves the euro vulnerable to a short-covering rally if central bank expectations shift. However, with a December ECB hike already widely anticipated, simply keeping that option open may not be enough to excite euro bulls. I suspect a more meaningful EUR/USD recovery would require a less-hawkish Fed, a more-hawkish ECB, or preferably both. With the Fed announcing its decision on Wednesday, the relative policy outlook could matter more than either central bank meeting in isolation.

Source: CME, CFTC (COT), LSEG

EUR/USD Technical Analysis: Euro vs US Dollar

While the euro is clearly in a downtrend, it is currently trapped between its 200-week moving averages. A bullish hammer formed above the lower trend channel and 200-week SMA, although momentum is turning lower once again on the daily chart. Perhaps bears are eyeing a retest of the 1.1130 low heading into the ECB and Fed meetings, although volatility could also narrow as the decisions approach.

The one-week implied volatility band spans 1.1072 to 1.1279, potentially bringing the May 2025 low into focus for bears should the ECB disappoint hawks relative to the Fed.

Source: ICE, TradingView