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EUR/USD heads into the October 29 ECB decision with bearish positioning stretched and downside momentum showing signs of fatigue near key chart support.

The ECB is widely expected to leave its key rate at 2.5% at 1315 GMT, leaving the market reaction largely dependent on President Christine Lagarde's guidance, particularly whether she keeps a December rate rise firmly in play amid renewed concern over French bond-market turmoil.

Speculators are reportedly short euros equivalent to $19 billion, the largest bearish bet since 2015. That leaves the single currency vulnerable to a sharp short-covering rebound if Lagarde sounds sufficiently hawkish, especially with markets assigning a 65% probability to a December ECB hike. Low one-month EUR/USD implied volatility of about 5.8 also suggests traders may be underestimating event risk.

EUR/USD has repeatedly found support around 1.1100, near the 200-week moving average at 1.1108 and the 50% retracement of the 1.0125–1.2084 advance at 1.1105. Holding above that area could pave the way for a rebound towards 1.1200 and 1.1254 despite the broader corrective trend.

Conversely, a cautious tone from Lagarde or escalating concerns over France's fiscal position could put 1.1105 under pressure and trigger deeper losses. However, narrowing US–German 10-year yield spreads (20 bps tighter in October) may help limit downside and support a corrective euro recovery.

The target for a corrective bounce is 1.1341, while a sustained break below 1.1100 would bring 1.0873 into focus.
EURUSD drop stretched, targets should pair bounce


EURUSD

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