EUR/USD drops to test prior day's closing price on stronger US dollar, hawkish Fed

• EUR/USD drops o a strong US dollar following hawkish Fed statement. 
• Traders await Powell's comments in the presser. 

EUR/USD has dropped to 1.0947 after the Federal Reserve has raised the benchmark interest rate by 25 basis points, in line with expectations. This was the first rate hike since 2018, aimed at stemming soaring inflation.

The single currency that had been rising on Ukraine crisis peace talks hopes had its legs taken out when the US dollar rallied some 0.30% on the Fed decision and statement. 

The Fed statement noted that the Ukraine war could lead to higher inflation and slower Gross Domestic Product. It also stated that most Fed officials see as many as seven rate increases in 2022. In the statement, it said that the members expect to begin reducing holdings of treasury securities and agency mortgage-backed securities at a coming meeting. 

Overall, the Fed sees inflation still high, owing to supply and demand mismatches caused by the pandemic, rising energy prices, and broader pricing pressures. Fed officials have signalled plans to lift rates steadily this year to lower inflation and this hawkish rhetoric is giving the US dollar a boost.

Essentially, the Fed’s dot plot is pencilling in rate hikes at every remaining meeting this year. Fed funds are now pricing in a 63% chance of a 50 bps hike on May 4, as a consequence, the US 2-year yields have moved in on the 2% mark.

The focus will now turn to the Fed's chairman, Jerome Powell, who will speak live at the presser. 

Watch Live: Jerome Powell at the FOMC presser

Traders betting on a stronger US dollar will be looking for Powell to sound hawkish and play down geopolitical risks, hinting at the potential for faster or even 50bp hikes later this year.

However, the dollar would come under pressure if he plays up the risk of geopolitical uncertainty on the US economy. If he suggests that inflation may slow in the second half of the year as COVID shocks fade, then that would be very negative for the US dollar.

EUR/USD technical analysis

The 4-hour M-formation and trendline support is compelling as the price stalls at the closing price from yesterday's business. This is acting as support, so there could be some upside from here with the neckline of the formation as a bullish target near 1.0980. This comes in as a 50% mean reversion of the hourly bearish impulse: