From Citi’s Steven Englander, a quick look at the various ways the Fed could surprise the market:
The potential USD negative surprise:
1) focus on the disappointing performance of the US economy, the downward pressure on real wages and weak levels of core inflation
2) reiteration of the view that global imbalances and inflation reflect misguided currency policies in EM
3) opening a door to QE3 if the outlook disappoints further
The potential for USD positive surprises:
1) a hard line on the fiscal situation and strong commitment to opposing any further monetization of the debt
2) any substantive concern that commodity price increases may persist and lead to second round inflation
3) concern on upward drift in long-term inflation expectations
4) any hint that the Fed is beginning to focus on tightening as the most likely next significant policy move
5) repetition of Treasury Secretary Geithner’s strong dollar declaration (although as with the Treasury Secretary’s declaration, the impact is likely to be limited at this stage).
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