(Bloomberg) -- Hedge funds have turned the most negative on the euro since the start of the year ahead of a watershed European Central Bank decision this week that could see policymakers break their cycle of interest-rate hikes. 

Speculative traders held a net short position of 6,421 contracts last week, a turnaround from the previous week when they were net long, according to the latest data by the Commodity Futures Trading Commission. Longer-term asset managers also trimmed their net long positions.

The market remains split on the chances of another ECB rate hike. Bets on a pause — now at 60% — have been growing amid mounting concerns over the worsening growth outlook, even as inflation remains stubbornly high.

“Stagflation in Europe is a real risk,” said Mark Dowding, chief investment officer at RBC BlueBay Asset Management, who is long the dollar against the euro. “Growth is disappointing, but limited progress is being made in bringing down core inflation.”

The mood on the euro has soured over the summer, with the common currency sliding for eight consecutive weeks to lose over 4% from a peak in July. Hedge funds dumped nearly 90% of their net long euro positions in August.

The outlook for the euro area’s economy is fading rapidly. The EU Commission cut its growth forecasts for the region on Monday, and is now expecting output in the 20-member bloc to rise by 0.8% in 2023, compared with an earlier forecast for 1.1% growth. Next year’s forecast was lowered by the same amount, to 1.3%.

The euro recouped some ground Monday against a broadly weaker dollar, trading 0.2% stronger just above $1.07. Still, any rebound could be short lived, said Francesco Pesole, a strategist at ING Groep NV. 

Stronger-than-expected US inflation data this week would favor the Federal Reserve keeping rates high, supporting the greenback, whereas ECB policymakers are “clearly facing growing division” as the economy slows, he said. 

“Given the upside risks for the dollar ahead of the US CPI release, we suspect another drop below $1.07 before the ECB announcement on Thursday is all but possible,” Pesole said.

--With assistance from James Hirai.

(Updates pricing. An earlier version of this story corrected the market-implied odds of an ECB pause in the third paragraph.)

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