The US dollar (USD) is showing signs of softness, attempting to hold on to the gains achieved after Thursday’s economic data release and comments from key Federal Reserve officials. However, the market’s attention is now squarely focused on Fed Chairman Jerome Powell’s upcoming speech at Jackson Hole, which is anticipated to set the tone for the next phase of US monetary policy.

Recent remarks from Kansas City Fed Bank President Jeffrey Schmid served as a cautionary note against expecting significant rate cuts in the near term. Coupled with stronger-than-expected US Purchasing Managers Index (PMI) numbers, which highlighted resilience in the Services sector, these developments gave the USD a temporary lift. Yet, as we move closer to the end of the week, traders and investors are keenly awaiting Powell’s address, with many speculating that he may hint at the possibility of rate cuts in September, though he is unlikely to commit to specific timelines or magnitudes.

This delicate balancing act by the Fed is crucial. Market participants are pricing in a 75.5% probability of a 25 basis points rate cut in September, with the CME FedWatch Tool further indicating a significant chance of additional cuts by November. However, any deviation from these expectations in Powell's speech could trigger sharp market movements. A hawkish tone or hesitation to signal rate cuts could lead to substantial bids for the Dollar, potentially pushing the US Dollar Index (DXY) higher. Conversely, clear confirmation of imminent rate cuts might see the DXY testing the psychological support level of 100.00:

Interestingly, despite the high stakes surrounding Powell’s speech, equity markets remain buoyant. Asian markets are closing the week on a positive note, European indices are trading in the green, and US futures suggest continued optimism. This resilience in equities suggests that, while monetary policy remains a critical driver, investors are not overly concerned about an imminent shift in Fed policy that could destabilize markets.

On the other side of the Atlantic, the British Pound continues to outperform the USD, extending its winning streak into a seventh consecutive session. The GBP/USD pair is trading just shy of a year-to-date high of 1.3130, reflecting the Dollar's inability to sustain Thursday’s upward momentum:

This strength in the Pound is underpinned by robust UK economic data, particularly the Flash UK S&P Global/CIPS PMI report for August. The report showed a notable uptick in overall business activity, driven by strong performances in both the manufacturing and services sectors. Moreover, the reduction in the backlog of work and a positive outlook for job creation further bolster the case for a resilient UK economy.

However, the market is still speculating on the Bank of England’s (BoE) next move. Despite the strong economic data, there remains an expectation that the BoE might cut rates before the year’s end. The easing of input prices in the services sector to their lowest levels in over three years is a relief for policymakers, as it suggests that inflationary pressures are diminishing, potentially giving the BoE more room to maneuver.