USD firms after market decides FOMC was in the price.

The market decides that the Fed cutting cycle was fully priced
With now perfect hindsight, the break lower in the US dollar ahead of the FOMC was a red herring, as the meeting and Fed Chair Powell’s press conference failed to deliver and new drive lower in forward expectations for the scale of the Fed’s rate cutting cycle. The market then decides that the likely path has been discounted and the USD backed up on the lack of new information. It’s one thing to recalibrate on the passing of a key event risk, and another to continue in this new direction. To see the US dollar launch a full-scale rally, we would likely need to see either risk aversion, possibly triggered by a route in US treasury markets, or persistently strong US data suggesting that the US economy is rebounding after a weak spell rather than weakening further. That would likewise drive US treasury yields higher. In short, US treasuries feel like the important independent variable here.

As well, the dominance of the US treasury yields for USDJPY is clear after the fairly hawkish Bank of Japan meeting Friday failed to support the Japanese yen. Friday and overnight we are seeing new highs for the post-GFC cycle in Japanese yields from 2-year JGB’s to 10-year JGB’s as the market firms its conviction that the Bank of Japan can hike rates as early as December or even October. An October hike possibility will increase to a near certainty if USDJPY continues higher through 149.00 especially through 150.00 from here.

No huge surprise that the rise in yields is seeing some further pressure on sterling, even as the longest UK gilt yields have yet to meaningfully press on the highs of the cycle. But last week’s ugly August deficit numbers (public sector net borrowing was GBP 18 billion for the month versus 12.8B expected) weighed as well.

Overall FOMC takeaway
Relative to the June economic projections, the new September Fed projections see marginally higher unemployment and marginally stronger growth for both this year and the following two years. They also forecast a marginally higher PCE core inflation for next year. And yet, the Fed is beginning a cutting cycle. Fed Chair Powell let slip in the presser last week that this was a “risk management” cut, clearly indicating he is in the group of 7 forecasters that see no further rate reductions this year. That scenario is certainly hawkish relative to expectations. Still, a slightly larger group of Fed forecasters sees the expected two additional rate cuts in the final two meetings of this year. And the “political dot” of new Fed governor Stephen Miran called for three fifty basis point moves to get the Fed rate all the way to 2.75-3.00% by the end of this year. All in all,

Chart: USDJPY
The break below the extended trading range last week was a red herring for USD bears as the kick-off in the Fed’s rate-cutting cycle failed to move forward expectations for Fed cutting lower still. It’s a classic tale of sell-the-rumor, buy-the-fact. Still, while USDJPY averted a break-down, any new break-out to the upside will likely require that US treasury yields continue significantly higher from here at the longer end of the curve, something that the Fed (and increasingly the US Treasury) will lean against, just as the Bank of Japan and Ministry of Finance will begin to mobilize strong medicine if USDJPY shoots above 150.00 in the coming days or weeks.