Here are the three main scenarios and potential market reactions.
1) Not rocking the boat
The Fed is now “patient” on interest rates, but we are not sure if they still intend to raise rates this year. Powell may stick to the script and refuse to commit. This may be perceived as leaving the door open to raising rates later this year.
This will not be news, as the FOMC Meetin Minutes implied this. Nevertheless, it may push the US Dollar higher across the board with currencies reacting according to their vulnerabilities or their strengths.
EUR/USD may react to the downside amid growing concerns about growth in the old continent. GBP/USD may ignore Powell as the focus is on Brexit. USD/JPY may move gradually higher. Commodity currencies may slide more than the yen, but probably nothing earth shattering
2) Optimism on trade
Powell may express optimism as the US and China near a deal, and Brexit may be postponed. In this scenario, he maintains the upbeat tone without any hawkish talk about rate hikes, not more than in the first scenario, where the door remains slightly open to a rate hike, but not in the near future.
This is a “risk on” and the greenback may fall across the board, with more significant plunges against commodity currencies, which enjoy an upbeat mood. The pound may also receive “more fuel to the fire.” The euro could also advance, and only the yen may suffer from the absence of demand for the ultimate safe haven.
3) Doom and gloom
Powell may react to the recent depressing data from retail sales and durable goods orders and paint a gloomy picture. While markets may find some comfort in the lower prospects of a rate hike, fears of a global recession may rise.
In this “risk off” scenario, the USD may be in high demand on safe haven flows, rising against all currencies apart from the yen. Commodity currencies are set to suffer more than the pound and the euro.