Powell Speech Shapes Dollar

Dollar Awaits Powell Guidance

Powell Speech Preview: Will Fed Chair signal two more rate cuts?

Federal Reserve (Fed) Chair Jerome Powell will deliver a speech on Economic Outlook and Monetary Policy at the National Associations for Business Economics (NABE) Annual Meeting in Philadelphia on Tuesday. With the United States government shutdown causing key data releases to be postponed, Powell's comments could influence the US Dollar's (USD) valuation in the near term.

Market Expectations

Although recent comments from Fed officials were mixed, the CME FedWatch Tool shows that markets are currently fully pricing in a 25 basis-points (bps) rate cut in October and see a nearly 90% probability of one more 25 bps reduction in December.

Fed Officials’ Mixed Views

Fed Governor Michael Barr said he is skeptical that the Fed can look through tariff-driven inflation and warned that the inflation goal faces significant risks, though some factors could mitigate those risks.
St. Louis Fed President Alberto Musalem argued that it will be difficult for the Fed to respond to short-term labor market fluctuations if inflation expectations become unanchored.
On a more dovish note, San Francisco Fed President Mary Daly noted that inflation has come in much less than feared and said that labor market softening looks worrisome if risks are not managed.
Philadelphia Fed President Anna Paulson added in her first public speech that she does not expect tariffs to cause sustained inflation, but sees labor market risks increasing.

Possible Scenarios for the US Dollar

Dovish Scenario: If Powell hints that the Fed will need to continue easing policy in response to worsening labor market conditions, the US Dollar could struggle to find demand.
Cautious Scenario: If Powell adopts a more cautious tone on consecutive rate cuts, citing uncertainty created by the lack of key inflation and employment data as well as the possibility of renewed US-China trade conflict, the US Dollar could continue to outperform its rivals.

Summary

Markets are on edge ahead of Powell’s speech. On one hand, expectations for two more rate cuts this year are firmly priced in. On the other, the absence of fresh data and the fragile global backdrop may push Powell to strike a more cautious note. His remarks could set the short-term direction for the US Dollar and ripple across global markets.