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Dollar Faces NFP Test Amid Fed-ECB Possible Divergence

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EUR/USD near 1.1700; break could trigger bearish extension

The US Dollar had a mixed week, dominated by the Fed rate decision and a possible divergence between the US and European rate policies. As expected, the Federal Reserve maintained the rate at 3.50% – 3.75% but signalled that it will keep rates higher for longer, at least until inflation cools.

On the other hand, European Central Bank (ECB) President Christine Lagarde mentioned last week during the press conference that followed the rate meeting that the ECB would consider a rate hike in June. According to the CME FedWatch tool, currently, there are negligible chances for the Fed to cut or hike during 2026.

If the ECB hikes in June, while the Fed stays put, we may see increased volatility for EUR/USD, with the euro possibly gaining the upper hand. At the time of writing, the dollar is attempting to regain 1.1700 support, after trading at 1.1785 against the euro earlier during the week.

Economic Calendar Highlights

The week’s first notable event will be the release of the US Services PMI (Purchasing Managers’ Index), which shows the opinions of about 300 purchasing managers about the overall business conditions in the Services sector. The release is scheduled for Tuesday at 2:00 pm GMT, and the impact is usually medium.

The rest of the week will be mostly calm, without major releases until Friday at 12:30 pm GMT when the US labor market data comes out. The Non-Farm Payrolls (NFP) report, which shows how many new jobs were created during the previous month, is expected to show only 60K, three times lower than last month’s 178K.

Lower numbers can prompt the Fed to cut the rates sooner, due to its mandate to keep job creation high and inflation close to the 2.0% target. The Average Hourly Earnings and Unemployment Rate will be released at the same time as the NFP. Together, the three indicators paint an accurate picture of the US jobs market and usually have a very high impact on the dollar’s trajectory.

Technical Outlook – EUR/USD

EUR/USD is coming off highs at 1.1785, with the dollar showing signs of strength on Friday. The US and Iran are still locked in conflict, which will affect the way the dollar behaves, creating a volatile environment.

Speaking strictly from a technical point of view, the support at 1.1700 is key for short-term movement. The last candle shows strong rejection, making the break of this support a distinct possibility. If this happens, the pair will likely descend towards 1.1600; otherwise, the euro bulls may take the pair towards April highs, at 1.1850.