US FX WRAP: Dollar weakness continues in Fed aftermath; JPY outperformance fuels intervention speculation

USD: The USD was little changed after core PCE inflation metrics for June and Q2 GDP came in beneath expectations. Markets also continued to digest Wednesday’s FOMC meeting, and the subsequent press conference from Chair Warsh, who failed to offer any new information. In the wake of the meeting, the short-end of the curve saw yields lower, while longer-end yields picked up. Analysts explained the action by noting that Warsh’s comments implied that there may be more focus on making balance sheet policy more active (trimming the balance sheet, sending long-end yields higher), which could mean there is less reliance on the FFR target as the primary policy tool (which could help soften shorter-dated yields, particularly since some of the hawkish expectations going into the meeting were left disappointed). However, the main driving force behind the Buck weakness today was the sharp upside of the JPY (see below).JPY: The JPY surged, seeing its biggest intraday rise since December 2023, without any headline catalysts, fuelling speculation of intervention, though this has not been officially confirmed. The rise follows recent warnings from officials, who have said that action can be taken to support the currency. Overnight, FinMin Katayama reiterated a readiness to take action, and the government has said that the yen’s weakness was harming the economy through higher import costs. Today’s sharp price action came after weak US data (PCE and GDP were below expectations), and ahead of the BoJ’s policy decision overnight, where the central bank is expected to keep rates unchanged at 1.00%; these expectations for a pause follow a hike at the last meeting, and traders will be focused on the statement and latest Outlook Report forecasts. In the later part of the US day, traders also suggested that the NY Fed carried out rate checks on spot USDJPY on behalf of the Treasury.GBP: The pound softened after the BoE held rates at 3.75%, erasing earlier gains in the wake of the meeting, as Gilts rallied, with 2yr yields seeing sharp downside; markets lowered expectations of future tightening by year-end to around 32bps (from around 38bps), while the implied chance of a September hike fell below 40% (vs over 60%). The MPC voted 6-3 (exp. 7-2) to keep rates steady, though the messaging was dovish: officials saw clear signs of easing domestic inflation pressure, and little evidence that the energy shock was feeding into wages or broader prices. Additionally, Governor Bailey stressed that it was not edging towards a rate rise. After the meeting, the pound saw upside after sharp moves lower in USDJPY, which weakened the USD vs peers.