US FX WRAP: Dollar reversed FOMC strength as yields pare gains; Eyes turn to BoJ overnight with GBP sold after the BoE

The Dollar Index was lower, paring some of its post-Fed strength to the benefit of most G10 FX peers. In terms of the broader reversal in US assets, Treasury yields were lower across the curve, with some citing improved Fed credibility as markets appeared to take greater confidence in Chair Warsh's commitment to return inflation to target. Elsewhere, Dollar-specific newsflow was fairly light; despite plenty of US data, none of it was tier one and it ultimately failed to move the needle. Jobless Claims were strong, maintaining the recent trend of low claims. However, Housing Starts and Building Permits missed expectations, while the Philly Fed index declined M/M but still beat the consensus. Pending Home Sales were soft. Ahead, traders await the end of the Fed blackout this evening, with Bowman and Schmid scheduled to speak on Friday, followed by Williams a couple of times next week. As always, the Middle East situation continues to be closely watched, with little new on the US/Iran front but several constructive reports regarding the wider region: 1) China reportedly pressed Iran to help rein in the Houthis following a Saudi appeal; 2) Saudi Arabia reportedly asked Oman to seek a two-week truce with the Houthis; and 3) Pakistan's Army Chief urged Iran to convince the Houthis not to attack Saudi Arabian energy facilities.

The Pound was the clear G10 laggard and saw losses against the Greenback following the latest BoE confab. Sterling fell after the Bank kept rates on hold at 3.75% in a 6-3 vote split, as expected. Overall, the meeting offered balanced arguments on the economy, with the statement highlighting that inflation risks remain tilted to the upside and adding that waiting too long for evidence of second-round effects would not be appropriate. In totality, traders could take mixed signals from the announcement, as it left the door more open to a November move while simultaneously pushing back against some of the more hawkish market pricing. Governor Bailey said that the outlook is too uncertain to judge market bets on 4 rate hikes. GBP pressure was likely aided by UK yields easing from their highs after the Bank announced it would pause APF gilt sales until April 2027 and confirmed reports that it would not sell long-dated gilts into the market.

Elsewhere, G10 FX generally benefited from the aforementioned Dollar weakness rather than much currency-specific newsflow. High-beta FX was supported by the return of risk-on sentiment, while Japanese Yen watchers await the BoJ overnight, where policymakers are widely expected to hike rates by 25bps to 1.25%, with money markets fully pricing such a move. ECB's Zigman was also on the wires, albeit with little market reaction, stating that market pricing does not determine the ECB's next steps and that there is considerable optimism around growth. Zigman added that there are no major second-round effects at present and that growth would be at risk if inflation is not tackled.

The MXN was unphased to reports in politico that President Trump and Mexican President Sheinbaum spoke by phone Wednesday as the two countries close in on a trade deal. Sources described the conversation as "so-so", and said that it “created a bit of noise” as “new topics” were introduced into the leaders’ discussion. A US official described the call as constructive, and noted talks continue to move into a positive direction - pushing back on any notion that the call did not go well.