USD/JPY: The mightly US dollar finds its feet on Fed Powell

• USD/JPY moves higher as markets get set for lift-off. 
• Tapering announcement around the corner, rate rises could come sooner than expected. 

USD/JPY is higher by some 50% in the aftermath of the Federal Reserve event on Wednesday and the pair has moved between a low of 109.12 and 109.90. It sits perched above the 200-hour smoothed simple moving average in bullish territory. 

The Federal Reserve on Wednesday surprised markets with a more hawkish stance on timings for rate hikes. Initially, risk assets rallied despite what was a bullish environment for the greenback on what was seen as pent-up demand for risk as to the Evergrande contagion danger abating. 

However, markets soon came to their senses when Fed Powell stuck to the script and advocated for lift-off in terms of tapering, giving the nod to an announcement to come as soon as next month's meeting. The greenback bounced back and risk assets turned on a dime, exposing a sell-off in the yen. 

Evergrande contagion risks fade

Meanwhile, China's Evergrande has agreed to settle interest payments on a domestic bond on Wednesday. Also, the Chinese central bank injected cash into the banking system, temporarily soothing fears of imminent contagion from the debt-laden property developer.

Asia's biggest junk-bond issuer is so entangled with China's broader economy that its fate has kept global stock and bond markets on tenterhooks. However, Fed's Powell says China's corporate debt problem can draw no parallels to the US and he feels that it is an isolated problem for China and that there is no direct exposure to the US.

However, as the day has progressed towards the close on Wall Street, the benchmarks are off their highs with the Dow Jones Industrial Average up 1%, to 34,301.85 and below 34,440 highs. The S&P 500 is down from the 4,416 highs to 4,395, up less than 1% on the day.  

US jobs under the spotlight

All eyes will be back on data now to determine when the Fed will indeed start to taper and move towards lift-off in rates. Powell put an emphasis on the labour market, although said he would not need to see a blockbuster report in order to start the taper.

''As the virus risk gradually fades, FOMC participants expect the labour market will continue to improve, with unemployment set to fall to 3.5% in 2024, versus 5.2% previously,'' analysts at ANZ Bank argued, 

''All up, the Fed’s projections show an economy that is undergoing a robust economic recovery that will justify a gradual normalisation in policy rates.''

DXY rallies as US dollar finds its feet

The US dollar was volatile over the event but it has since found demand on the prospects of a hawkish Fed for the remainder of this year and the first half of 2022.