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The upcoming FOMC meeting holds high expectations towards the end of the QE2 program. Bernanke, who will meet the press, is likely to supply more reasons to sell the dollar. FOMC Preview with 3 scenarios for the first ever press conference that will accompany it.

This meeting of the FOMC on April 27th, will be different – it will be the first time that Ben Bernanke will meet the press following the rate decision. This practice, which is the norm in Europe, will provide a longer period of volatility for currency markets.

Inflation and Interest Rates

The decision, released at 16:30 GMT, is likely to contain a few changes. The headline CPI is on the rise, and passed an annual pace of 2.1%. This rise, fueled by commodity prices, will likely be mentioned in the statement.

But this elevated concern about inflation is likely to be immediately curbed by stating that Core CPI, which excludes volatile price of oil and food, is still low.

Therefore, the phrase about leaving the Federal Funds Rate at a low level for an “extended period of time” is due to remain in the FOMC Statement.

So, contrary to the hawkish sentiment heard by FOMC members such as Charles Plosser, a hint about a rate hike in 2011 isn’t likely now.

QE2, QE2+ QE3 in the Statement

The second quantitative easing program, announced in November is nearing an end in June. What will happen after the 600 billion dollars have been spent? This is the big question. Some Fed hawks suggested that the program could end before June, as the US economy is improving.

The chances are very slim here as well – William Dudley, of the New York Fed, played it down, and the Fed isn’t likely to reverse a decision it already made.

What we can get in the statement is some sort of the opposite. I’m not talking about printing more money, QE3, but rather a reinvestment of maturing debt. This will make an exit from the QE2 program somewhat softer.

A mention of such a QE2+ program, that will considered in the next meeting could be mentioned in the upcoming FOMC Statement and could weaken the dollar.

Highly anticipated press conference

The historic press conference by Ben Bernanke is scheduled for 18:15 GMT, 105 minutes after the statement. The currency markets will continue rocking with every facial expression of Bernanke and any statement.

One possible question can be around the credit downgrade warning by S&P – Bernanke will likely send the question to the politicians in Washington and might say that the deficit should be lower – no news are expected here.

The big question will be around the quantitative easing scheme:  Will the program end in June What will Ben Bernanke answer? 3 scenarios:

  1. A definite Yes,:the dollar will rise as speculations will end. The hawks will celebrate a victory and the road to future rate hikes will finally be opened, although not so soon. Probability: low. The doves seem in control.
  2. No – a hint of extension: There’s a higher chance of him saying something like “probably not” and that extending the program is possible. This means that he opens the door for QE3. Such an over-dovish policy will result in another plunge in the dollar, as QE3 seemed to be off the table. Probability: Medium. QE3 might eventually happen, but big hints are unlikely to be provided now.
  3. Confused answer: Bernanke will try to avoid a direct answer by saying that  policy will be carefully measured according to the new data  with a trembling voice (as seen a few months ago in 60 minutes) and will be asked about it again and again by reporters. This scenario is also bearish for the dollar. Without a straight answer, the market will assume that there’s a chance of QE3, and this will weaken the dollar. Perhaps not as strong as the previous scenario, but the dollar will still be hit. Probability: high. Confusing language is common at the Federal Reserve.

This event will create tension towards it on speculation, and will result in hours of action after the press conference ends, as every word will be analyzed again and again.

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