EUR/USD wanes back under 1.1100 but still holds on to solid post-Fed policy announcement gains

• EUR/USD has been waning from earlier session highs in recent trade and is now back below the 1.1100 level.
• Since Wednesday’s Fed hawkish policy announcement, EUR/USD has gained about 1.0%, flummoxing some analysts.
• Markets seem to currently be being driven by “hopes” for a Russo-Ukraine peace deal, meaning geopolitics remains a key theme.

EUR/USD has been waning in recent trade and recently fell back under the 1.1100 level, meaning that the pair has, for now, failed to break above its 21-Day Moving Average at 1.1108. Nonetheless, the pair is still trading with gains of about 0.6% on the day, as the dollar succumbs to broad weakness despite strong US weekly jobless claims numbers and a better-than-expected Philly Fed Manufacturing Survey released earlier in the session.

Since Wednesday’s Fed policy announcement EUR/USD has gained about 1.0%, despite the fact that the Fed signaled its intention to hike interest rates at all of its remaining rate decisions this year, which was more hawkish than market participants had been expecting. Fed Chair Jerome Powell even warned that the pace of rate increases might be accelerated if deemed necessary and that the Fed could decide to take interest rates well beyond the so-called “neutral” level (in the 2.0-2.5% area) if inflation fails to abate as expected.

Despite all this hawkishness, the buck has failed to benefit, flummoxing some analysts. Clearly, markets are more focused right now on geopolitics and the apparent hope that Russia and Ukraine might reach some sort of peace deal in the near future. Reporting on this front over the last few days has been mixed and conflicting, making it difficult to assign a probability to a peace deal being reached.

But traders have nonetheless used “hope” as an excuse to pair US dollar longs, just as they have used this as an excuse to bid up equities in recent sessions. Whether this momentum can last is the big question and markets are very much expected to remain choppy and headline-driven with a focus on geopolitical headlines in the coming weeks.

Ultimately, while a peace deal might offer EUR/USD some near-term respite, the theme of West/Russia economic decoupling is not going anywhere. A ceasefire in Ukraine doesn’t mean the massive hit 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 level of support turned resistance for EUR/USD, and its failure on Thursday to hold above this level might herald some near-term profit taking that could see the pair move back towards 1.10.