On Thursday, the European Central Bank took the stand to deliver its interest rate decision, forcing a volatile reaction from the market by slowing the rate of their hiking cycle to 25bps. While the decision aligned with the market’s consensus, traders started pricing in the possibility of the cycle nearing its end. 

However, Christine Lagarde swiftly stepped in, reassuring the market that the ECB is not considering a pause, as they still have a long way to go in bringing inflation back to the target. These statements signalled a growing divergence in policy with the Federal Reserve, who have opened the door for a pause in their next meeting. As the Non-Farm Payroll report nears, everything could instantly change for the EURUSD currency pair. 

Technical 

A rising wedge has formed on the 4H chart, as the initial bearishness following the announcement got corrected as Lagarde delivered her hawkish commentary. The currency pair pushed through the daily pivot resistance at $1.1029, with the market looking to retest the resistance to confirm the break’s sustainability. 

If the NFP report signal further Federal Reserve hawkishness, the market could break down the pivot point to trigger the breakdown of the rising wedge. Support exists at $1.1005 and $1.0983, where a high volume breakdown could lead the bears toward a neckline at $1.0950. 

Conversely, a soft report could support the longer-term strength of the Euro on a potential policy divergence, which could see the bulls looking higher at $1.1067. In the scenario where the bulls break through this resistance, they could look to move out of the wedge toward higher resistance at $1.1098. 

Summary 

While the currency pair is backed by a potential policy divergence on a more hawkish ECB, the NFP report later on Friday could change the fundamental outlook for the Federal Reserve’s interest rate path as we advance, which could drive the short-term price action in the EURUSD. 

Sources: Koyfin, Tradingview, Reuters