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.
Sessions of this kind, where a sharp yen rally arrives without a headline and officials have been verbally warning beforehand, have tended to sort into two cases: genuine intervention, which shows up in official confirmation, settlement data, and often follow-through selling of dollars over subsequent sessions, and positioning-driven squeezes that fade once the suspicion is dispelled. Rate checks by the NY Fed on behalf of the Treasury are the classic tell in these episodes, since they have historically preceded or accompanied actual operations and are rarely a routine exercise; the distinction between a check and executed intervention matters for how much follow-through the move carries. The transmission into broader FX runs through the funding and carry channel: yen strength unwinds crowded short-JPY positioning and drags the dollar index lower against the whole peer set rather than reflecting dollar-specific selling, which fits the pattern here where GBP and EUR gained only in sympathy. Curve behaviour after the FOMC, front end lower and long end higher on talk of a more active balance sheet, echoes past episodes where balance sheet guidance steepened the curve and softened rate differentials at the front, a mix that has historically been dollar-negative at the margin. The follow-ons that matter are confirmation or denial of intervention from Japanese authorities, the BoJ decision and Outlook Report, and whether verbal rhetoric escalates into repeated operations, since single interventions have tended to slow depreciation rather than reverse the underlying rate-differential trend. BoE pricing shifts of this size after a dovish hold typically re-anchor through the next inflation and wage prints rather than persist on one meeting alone.