US stock markets retreated yesterday, with investors trimming long positions ahead of Powell's address. The S&P 500 fell 0.90%, while the tech-heavy Nasdaq 100 dropped 1.70%.

Ipek Ozkardeskaya, Senior Analyst at Swissquote Bank, noted that Powell is expected to temper expectations for aggressive rate cuts.

"There is no reason for the Fed to start cutting the interest rates by big chunks in the absence of a severe economic slowdown, market stress, or a crisis," Ozkardeskaya said.

Recent comments from other Fed officials have also pointed towards a more cautious approach to rate cuts. Kansas Fed President Schmid expressed a desire to see more data before supporting rate cuts, while Boston Fed's Susan Collins advocated for "gradual and methodical" reductions.

Currently, swap markets are pricing in around 95 basis points of cuts from the Fed between September and year-end. However, Ozkardeskaya suggests this may be overly optimistic.

"From where we stand right now, it seems more likely that this will not happen than the opposite," she said.

The analyst warned that if the Fed pauses rate cuts after an initial reduction, it could result in only a 50 basis point cut for the year, potentially weighing on risk appetite and boosting the US dollar.

Yesterday's economic data presented a mixed picture. While jobless claims met expectations and continuing claims rose less than anticipated, US manufacturing activity slowed more than expected.

In Europe, French services received a temporary boost from Olympics preparations, but German manufacturing figures remained weak, confirming ongoing challenges for the Eurozone's largest economy.

The British pound showed resilience despite some retreat, supported by stronger-than-expected PMI numbers indicating the UK economy's relatively robust performance.

As markets brace for Powell's speech, Ozkardeskaya expects the Fed chair to temper overpriced cut expectations, potentially leading to a rebound in the US dollar from oversold levels.