At its June meeting, FOMC members unexpectedly indicated in the bank’s ‘dot plot’ that two more 25 basis point hikes could be on the way during the remainder of 2023, a view echoed in Powell’s communications. Market participants, however, have not necessarily bought into the Fed’s rhetoric, with investors particularly sceptical at the possibility of further tightening following the sizable June CPI miss.

“The Fed has somewhat backed itself into a corner, and another 25 bps increase in rates still appears a done deal on Wednesday - this is indeed effectively fully priced in by futures markets. That said, we think that there is now enough evidence to limit the need for more hikes beyond then, and believe that Wednesday’s rate increase will transpire to be the last," Matthew Ryan, Head of Market Strategy at global financial services firm Ebury, said.

“For our money, Powell will stress this week that the Fed is taking a data-dependent approach, effectively punting its decision on when to end the hiking cycle to the following meeting in September, when updated projections will be released.

“Should the Fed kick the can down the road, and adopt a fully data-dependent approach at its meeting this week, then we would expect a relatively muted response in the US dollar on Wednesday. In the event that the FOMC holds the line, and explicitly indicates that it is prepared to raise rates again at some point before the end of the year, then the dollar would probably rally sharply.

“At the time of writing, financial markets are only assigning a 12% implied probability of a second 25bp hike in September, and around a one-in-three shot of one by November. The dovish scenario, and one that would no doubt trigger a knee-jerk sell-off in the greenback, would be for Powell to specifically indicate that the Fed is likely done raising rates. As mentioned, we do not expect this to be the case just yet, as Fed officials will probably want to see more evidence on the inflation retreat before then.”