EUR/USD rallied Tuesday as the U.S. dollar, yields, and oil all declined, giving bears a squeeze. However, investors positioned for a sustained rally may be walking into a buy-the-rumor-sell-the-fact scenario heading into Thursday's ECB decision.

Markets have been pricing in roughly three 25bps ECB rate hikes over the next nine months, a view that took shape in late February and has remained largely stable since the end of April. While a 25bps hike at Thursday's meeting is widely expected, the real market mover could be ECB President Christine Lagarde's press conference. EUR/USD bulls will need a decisively hawkish tone from Lagarde to push rates markets to price in additional tightening beyond current expectations.

Some may doubt whether that hawkish signal will come. With euro zone economic growth still sluggish, Lagarde's language could fall short of bulls' hopes. Any disappointment on that front could send both rates and EUR/USD lower.

Technically, a pullback could bring the pair toward the neckline of a head-and-shoulders topping pattern on the monthly chart, sitting near 1.1425. A completion of that pattern would signal the potential for a significant and deeper decline.

Beyond the ECB, attention will quickly shift to next week's Federal Reserve meeting, where investors will be watching closely to gauge how new Fed Chair Kevin Warsh positions himself on monetary policy.
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(Christopher Romano is a Reuters market analyst. The views expressed are his own)