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

• Fed Chair Jerome Powell will speak on policy and economic outlook on Tuesday.
• Markets widely expect the Fed to cut the policy rate twice more this year.
• The US Dollar could react to Powell's comments in the absence of key data releases.

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 US government shutdown causing key data releases to be postponed, Powell's comments could influence the US Dollar's (USD) valuation in the near term.

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 Governor Michael Barr said that he is skeptical that the Fed can look through tariff-drive inflation and stated that the inflation goal faces significant risks. He further added that some factors could mitigate those risks. Similarly, 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 had feared and said that the labor market softening looks worrisome if they don't manage the risks. Moreover, Philadelphia Fed President Anna Paulson said in her first public speech that she doesn't expect tariffs to cause sustained inflation and added that she sees labor market risks increasing.

In case Powell hints that they will need to continue to ease the policy in response to the worsening conditions in the labor market, the USD could have a difficult time finding demand. However, the market positioning suggests that the USD doesn't have a lot of room left on the downside even if a December rate cut is fully priced-in.

On the other hand, the USD could continue to outperform its rivals if Powell adopts a cautious tone on consecutive rate cuts, citing the uncertainty created by the lack of key inflation and employment data, as well as the possibility of the re-escalation of the US-China trade conflict.