- EUR/USD falls against a strong US dollar after a Fed hawkish line statement.
- Traders await Powell’s comments at the press conference.
The EUR/USD has fallen to 1.0947 after the Federal Reserve raised the benchmark interest rate by 25 basis points, meeting expectations. This was the first rate hike since 2018, with the aim of curbing rampant inflation.
The single currency that had been rising on hopes of peace talks over the Ukraine crisis took a hit as the US dollar rose 0.30% on the Fed’s decision and statement.
The Fed statement noted that the Ukraine war could lead to higher inflation and slower Gross Domestic Product. He also said most Fed officials see as many as seven rate hikes in 2022. In the statement, he said members expect to start reducing holdings of Treasury securities and agency mortgage-backed securities at an upcoming meeting.
Overall, the Fed sees inflation remaining high, due to supply-demand mismatches caused by the pandemic, rising energy prices, and broader pricing pressures. Fed officials have signaled plans to raise rates steadily this year to reduce inflation and this aggressive rhetoric is giving the US dollar a boost.
Essentially, the Fed’s dot plot is pointing to rate hikes at every remaining meeting this year. Fed funds are now pricing in a 63% chance of a 50bp hike on May 4, as a consequence US 2Y yields have moved into the 2% mark.
Attention will now turn to Fed Chairman Jerome Powell, who will speak live at the press conference.
Traders betting on a stronger US dollar will be looking for Powell to sound hawkish and downplay geopolitical risks, suggesting the potential for faster or even 50bps hikes later this year.
However, the dollar would come under pressure if the risk of geopolitical uncertainty in the US economy increases. If it suggests that inflation may slow in the second half of the year as the COVID outbreaks fade, that would be very negative for the US dollar.
EUR/USD technical analysis
The 4-hour M formation and trend line support are convincing as price stops at the closing price of yesterday’s trade. This is acting as support so there could be some bullishness from here with the neckline of the formation targeting upside near 1.0980. This is presented as a 50% mean reversal of bearish momentum per hour:
Source: Fx Street
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