Written by Charalampos Pissouros, Senior Investment Analyst at XM.com. An original version of this article can be found here.

The U.S. Dollar gained ground against most of the other major currencies on Tuesday, losing only against the Japanese yen.

Although the moves were somewhat reversed during the Asian session today, yesterday’s action suggests a risk-off trading activity, ahead of Fed Chair Powell appearance before the U.S. House of Representatives’ Financial Affairs Committee for his semiannual testimony on monetary policy.

What encouraged traders to buy some dollars may have been the surge in U.S. housing starts and the rebound in building permits, which may have prompted some participants to increase their Fed hike bets.

Currently, they are almost certain that a 25bps may be on the cards by November, but they remain unconvinced on whether another one could materialize before the end credits of this tightening campaign roll.

Today and tomorrow, Chair Powell will have another opportunity to convince investors about the Fed’s intentions, but with several data sets pointing to easing price pressures and softening wage growth, it may be hard for the Fed Chief to find convincing arguments.

After all, the full effect of the prior rate increases is not fully felt by the economy yet.

Above: EURUSD at four-hour intervals.

The surge in housing starts and the fact that 1-year inflation expectations remain well above the Fed’s target of 2%, despite sliding notably, could be among the few relatively reasonable arguments.

So, if Powell stresses the need for keeping rates higher for longer because there is still a long way to go before the job is done, the dollar could gain a bit more.

That said, calling for a bullish reversal still seems unwise as incoming data pointing to further cooling of price pressures could translate into further declines in inflation expectations and perhaps allow market participants to maintain their rate-cut bets for early next year, despite Powell saying at last week’s press conference that any rate cuts are "a couple of years out."

On the other side of the spectrum is the Bank of England, which following today’s higher-than-expected CPI numbers for May is under pressure to turn more aggressive.

With the core CPI rate rising to 7.1% year-on-year, the probability of a 50bps hike on Thursday now stands at 40%, while ahead of the data, it was hovering at around 30%. As for the foreseeable future, investors are pencilling in 160bps worth of additional rate increases, up from 140bps yesterday.

With such pricing, the stakes are now high and anything less than a 50bps hike accompanied with a commitment to deliver more could push the pound off the cliff.

The pound could gain and extend its uptrend only if Bailey and co rise to the occasion and meet investors’ expectations, or better say demands.

However, the risks seem asymmetrical. Any potential gains due to a hawkish outcome are unlikely to be as large as any potential tumble in the case of disappointment.

All three of Wall Street’s main indices traded in the red yesterday, with investors perhaps locking some profits after a modest rate cut by China did little to boost their sentiment, but also due to reducing their risk exposure ahead of Fed Chair Powell’s testimony.

Equities could extend their retreat should Powell convince the market that a couple of more hikes are looming and that rate cuts are unlikely to begin as early as it is currently priced in, but similarly to the US dollar, it is too early to argue about a reversal.

With the Nasdaq around 47% up from its October lows, a decent setback may be a more-than-normal counterwave within the broader uptrend, which could very well resume if market participants maintain bets about a series of Fed rate cuts next year.