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What is the refresh rate of your monitor? You aren't doing this on a 60 Hz screen are you?
The FSR 3 and frame gen implementation in Cyberpunk is one of the worst one it looks bleeding awful, you have a 9070xt so i would download one of the FSR 4 mods. or if you dont like using mods then use FSR 2.1 it looks better than FSR 3 in this game and use AFMF2.1 in the driver instead of the in game frame gen.
And enable Ant Lag in the driver as well it helps with the extra latency of using the frame gen
I did test other games with AMD frame gen built in and found out that any game I tested with frame gen 3.0 isn't smooth with it on. I then tried the games that use frame gen 3.1 and they were always very smooth with it turned on. Seems to be an issue with the 3.0 implementation, which sucks.
If your cap is going over 120 and causing the issue, have you tried capping it below that? try 110, if it is still going over try 100 and so on until you find the sweetspot.
If your TV isn't doing well with variable frames it might be better to turn off framegen, enable vsync and just regain real frames through a more aggressive upscaling or lowering some graphical settings. Framegen is aimed at people using very high refresh VRR monitors, not tvs that more often than not do need vsync.
I think I'll have to give up on this unless they actually update the game with 3.1, which knowing CD Projekt Red they probably won't.