The market is buzzing with anticipation ahead of the FOMC decision, and with OIS pricing in about 40bps of cuts, we’re now looking at a 65%+ chance of a 50bps move. In typical FX fashion, USD/JPY—the ultimate market rollercoaster—jumped back over the 142.00 mark following a retail sales report that was “consensus enough” to get Tokyo in the game selling USDJPY at the Tokyo Open. Earlier in the day, Tokyo traders had managed to push USD/JPY down to 141.40, but the takedown didn’t last long before the pair reboarded the ride and started climbing higher again.

As the Fed deliberates, this is the classic moment of calm before the storm. The real question isn’t just how much they cut, but what comes next—will Powell's press conference or the dot plot hint at more aggressive cuts down the line? One thing’s for sure: with USD/JPY bouncing around like this, the FX market is already bracing for some serious whiplash.( BTW, I have no idea who is buying USDJPY in New York, but we are guessing some hedge fund betting on the Fed delivering a Dovish Dud)

But here’s the kicker: —the control group hit expectations, and that’s what really counts. The Fed’s decision isn’t going to hinge on one report. It’s about forward guidance and looking ahead, not just playing catch-up. And let’s be real: A slow creep in unemployment isn’t something you just brush off. Pretending it's not an issue is like ignoring a tiny crack in the dam—it’s only a matter of time before the flood comes. The jobs market doesn’t just stumble, it crashes, and when it does, it’s fast and brutal. That’s why cutting 50bps now makes sense—it’s pre-emptive insurance, not a panic move.

Look at real disposable income—growing at just 1.1% in July, with an average of 1.2% since February. Meanwhile, consumer spending is outpacing that at 2.5%. This is the equivalent of trying to run a marathon on fumes. At some point, savings dry up, and spending will slow down, which puts even more pressure on the Fed to act before the consumer wheels come off.

Our base case? A 50bps cut tonight. Why? Because the Fed needs to steer the ship back toward neutral, and they’ve got the Summary of Economic Projections (SEPs) to show they’re ahead of the game, not lagging behind. A 50bps move today gives them room to plot a path of two more 25bps cuts in November and December. They were late to the tightening party in 2022, and the last thing they want now is to be seen as behind the curve again. If this plays out, expect the front end of rates to drop like a rock, and USD/JPY to slice through 140, possibly dipping below 139.

Even if they go with 25bps, I’m not too worried. Sure, USD/JPY might jerk higher, but it’ll be a quick fade. The real story will shift to risk sentiment, with stocks and oil prices taking center stage and not in a bullish way. A 25bps cut will give the dollar only short-lived relief, especially against the yen, which will be right back in play as traders digest the bigger picture, only from a safe-haven perspective.

As for EUR/USD? With no major eurozone data today, it’s all eyes on the FOMC. If the Fed pulls the 50bps trigger, watch the US 2-year yield drop, steepening the 2s10s curve to levels we haven’t seen since June 2022. EUR/USD could easily test 1.1200.

And just a quick note—when we started selling USD/JPY four to six weeks ago ahead of the FOMC, we knew the decision tree wasn’t going to be perfect. Even with all the prep, sometimes trades flop. But don’t sweat it—go back, adjust the strategy, and remember that significantly lower rates are the new norm. This is the beginning of an easing cycle that’s here for the long haul.

In short: buckle up.

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