EUR/USD declines back below 1.1100

• EUR/USD has been falling from the previous session’s highs in recent trade and is now back below the 1.1100 level.
• Since the Fed’s hawkish policy announcement on Wednesday, EUR/USD has gained around 1.0%, unnerving some analysts.
• Markets appear to be currently being buoyed by “hopes” for a Russia-Ukraine peace deal, meaning geopolitics remains a key issue.

The EUR/USD has been falling in recent trade and recently fell back below the 1.1100 level, which means that the pair has, for now, failed to break above its 21-day moving average at 1.1108. Nonetheless, the pair still trades around 0.6% gains on the day as the dollar succumbs to broad weakness despite strong weekly US jobless claims figures and a Fed manufacturing survey. better-than-expected Philly posted earlier in the session.

Since the Fed’s policy announcement on Wednesday, EUR/USD has gained around 1.0%, despite the Fed signaling its intention to raise interest rates in all of its remaining rate decisions this year, which it was more aggressive than market participants expected. Fed Chairman Jerome Powell even warned that the pace of rate hikes could be accelerated if deemed necessary and that the Fed could decide to take interest rates well beyond the so-called “neutral” level (in the area of 2.0-2.5%) if inflation fails to decline as expected.

Despite all this aggressive attitude, the dollar has not benefited, baffling some analysts. Clearly, the markets are more focused at the moment on geopolitics and the apparent hope that Russia and Ukraine can come to some sort of peace deal in the near future. Reports on this front in recent days have been mixed and contradictory, making it difficult to assign a probability that a peace agreement will be reached.

However, traders have used “hope” as an excuse to match long US dollar positions, just as they have used it as an excuse to bid shares higher in recent sessions. Whether this momentum can last is the big question and markets are expected to remain choppy and headline-driven with a focus on geopolitical headlines in the coming weeks.

Ultimately, while a peace deal could offer EUR/USD some short-term respite, the issue of economic decoupling of Russia and the West is going nowhere. A ceasefire in Ukraine does not mean that the massive blow to the eurozone economy as a result of Western sanctions on Russia for its invasion will be magically and immediately negated. 1.1100 is actually a key support-turned-resistance level for EUR/USD, and its failure to hold above this level on Thursday could herald short-term profit-taking that could push the pair back towards 1.10.

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