Powell Speech Cheat Sheet: Three scenarios, only one dollar-negative

• Fed Chair Powell will likely leave the door open to a September taper announcement, boosting the dollar.
• Dodging the timing of bond purchases would leave the greenback bid as well.
• Only a full denial of tapering would send the dollar down.

Cresting – the art of staying on top of a ridge without descending or ascending is the most recent description of inflation by some Federal Reserve officials. Fed Chair Jerome Powell will have his chance to comment on high, yet mixed consumer prices in July – and also on the burning question for the market: when will the bank taper down its bond-buying scheme. Dollar bulls are likely to benefit from his comments.

According to both the Wall Street Journal and CNBC, the Fed is nearing an announcement of tapering its $120 billion/month purchase program already in its upcoming September meeting. That would imply the implementation of cuts in October and November and then a process of 8-10 months between the initial tapering and the end of the bank's balance sheet expansion. What would come next is a dreaded rate hike.  

Ahead of September's meeting, Powell is due to speak next week's at the Jackson Hole Symposium, where Fed Chairs often provided hints about policy changes. Before that gathering, comes Tuesday's Town Hall, which investors are eagerly awaiting.

Here are three scenarios for the event.

1) Going with the hawkish flow

Powell may opt to confirm what some of his colleagues and the financial press hinted to – open the door to a taper announcement in September. He will likely refrain from making a direct commitment, but rather say that it would come sooner than anticipated, fairly soon, in a short period of time, or something similar. 

The Fed Chair promised to signal such a move "well in advance" and he is likely encouraged by the relative calm since the bank's initial hawkish tilt back in June. His remarks would, therefore, not be a shocker and would not cause a 2013-style "taper tantrum." He would also lower expectations of next week's gathering. 

Despite the lack of a shock to markets, the dollar would still rise as printing fewer greenbacks would result in a stronger currency. The probability is medium.

2) Trying to dodge the topic

The past two jobs reports were upbeat, but perhaps insufficient to achieve "further substantial progress" – and only a third successful report would be the charm. August's Nonfarm Payrolls are due out on September 3, and Powell may opt to skip the topic.

However, investors are already expecting a September taper announcement and the lack of an outright denial would indicate acceptance. Moreover, the risk-off mood in markets is supportive of a stronger dollar. By saying nothing, Powell would allow the trend to continue.

Nevertheless, Powell would find it hard to fully skip the topic, as Tuesday's public appearance is in a Town Hall format – audience questions are planned. Any direct question that is not fully denied would be seen as an open door to a taper move in September and a stronger dollar.

The probability is high.

3) Leading the dovish pushback

The leader of the Fed is a dove, and he may show his true colors on Tuesday by pushing back against rife market speculation. He may cling to the Fed's wording that a decision is still a few meetings – in the plural – away. Powell could back such a stance by saying that core inflation is already slowing and repeating that millions are out of work.

By standing against any tightening, he would remind markets that while hawks are becoming louder, doves still have the upper hand. That would cause a shift in perceptions and would send the dollar down.

The probability is low.

Conclusion

Fed Chair Jerome Powell speaks amid increasing expectations of a September tapering announcement. Without an outright rejection of this notion, the dollar could advance.