Fed Holds Steady as Yen Dynamics and Leverage Risks Take Center Stage

The latest Federal Reserve decision delivered little in terms of surprise, with markets already positioned for no change in rates. As expected, policy remained unchanged and volatility was muted. Attention quickly shifted away from the decision itself toward broader macro themes, particularly currency dynamics and the growing role of leverage in global markets.

Fed Decision and Market Reaction

With no policy adjustment announced, the focus turned to nuances in the statement and Chair Powell’s press conference. However, even this offered limited insight. Powell appeared intent on avoiding forward guidance or controversy, repeatedly deflecting questions during the Q&A. Markets largely looked past the event, with the understanding that Powell’s influence may be waning ahead of an eventual leadership transition that is expected to lean more dovish under President Trump.

As a result, attention now shifts firmly toward upcoming US data, particularly the Non-Farm Payrolls report and inflation releases. The Fed explicitly highlighted elevated inflation as a key consideration, reinforcing the importance of these data points for shaping near-term expectations.

Currency Markets and the Yen Focus

A more impactful development occurred earlier in the session following comments from US Treasury Secretary Scott Bessent, who stated that the US was not intervening in USD/JPY. This triggered an immediate rebound in USD/JPY and spilled over into other yen crosses, including GBP/JPY and EUR/JPY.

These moves underscore the continued importance of yen dynamics in global markets, especially given the role of the yen-funded carry trade over recent years.

Leverage and Deleveraging Risk

Global equity gains over the past four years have been supported in part by rising leverage, much of it tied to low-cost funding from Japan. Investors have borrowed in yen at low rates and deployed capital into higher-yielding assets globally, including equities and high-growth themes such as AI. To manage currency risk, many participants hedged through short-yen positions, supporting USD/JPY and other yen crosses.

The risk emerges if USD/JPY begins to fall sharply. In such a scenario, the incentive to maintain those hedges diminishes, potentially accelerating yen strength and forcing a broader deleveraging. This dynamic was evident in mid-2024, when USD/JPY weakness coincided with pressure on US equities following a US CPI surprise and Bank of Japan intervention.

Technical and Positioning Considerations

Despite these risks, carry dynamics still favour yen weakness for now. Rollover remains supportive of long USD/JPY positions, with shorts paying carry while longs receive it. That said, this remains a crowded trade. Should upcoming US data increase confidence around earlier or deeper rate cuts, positioning could unwind quickly, adding downside pressure to USD/JPY.

Key resistance remains in the 154.45 to 155.00 region, which has so far capped rallies. A move back toward 160.00 would likely see bullish momentum fade, given this level has acted as a clear intervention threshold for Japanese authorities.

USD/JPY Daily Chart

Bottom Line

While near-term carry incentives still support yen weakness, the balance of risks is shifting. Upcoming US labour and inflation data will be critical in determining whether leverage remains intact or begins to unwind. For now, selective yen-cross exposure such as GBP/JPY and EUR/JPY remains preferable should risk appetite stabilise and yen weakness reassert itself.