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Economists at TD Securities analyze three possible scenarios for the Fed’s Monetary Policy Statement due out on Wednesday at 18:00 GMT. A dovish tone is set to reinforce the cyclical headwinds facing the USD and soggy trading tone, but likely supportive of risk appetite. 105.20 and 1.1917 in USD/JPY and EUR/USD will be key pivots.

Key quotes

“Hawkish (13%): Minimal changes to forward guidance and characterization of QE in the statement; more upbeat tone on the outlook following stronger-than-expected data recently; 2023 economic projections consistent with tightening soon after end of 2023. Suggestion that Fed may have eased enough given better-than-expected data recently. USD/JPY 106.20 EUR/USD 1.1760.”

“Base Case (65%): No inflation-outcome-based specificity in forward guidance yet, but AIT reflected in the statement and QE wording changed to make financial conditions broadly the main focus. Little change in tone on the economy. Economic projections for 2023 suggesting no tightening until well after the end of 2023. Emphasis on downside risks. Suggestion that dovish forward guidance could be made more dovish when communications part of review concludes, and that QE could be made more accommodative via the composition of purchases. USD/JPY 105.20 EUR/USD 1.1975.”

“Dovish (22%): Introduction of specific inflation-outcome-based forward guidance, such as a minimum 2.5% pace before tightening; QE made more long-end focused, boosting stimulus in effort to raise inflation and lower unemployment. Sub-2% median inflation projection for 2023. Unambiguous signal that officials will back up their words on AIT with action. USD/JPY 104.80 EUR/USD 1.2010.”