US dollar predictions: FOMC Scenarios, Changes in US Economy, US Fed predicted to lower economic forecasts

 But first, a little look at the US dollar (Currency:USD) spots shows us the US currency is under pressure ahead of today's FOMC event:

The pound versus US dollar exchange rate is 0.09 pct higher at 1.5659.
The euro versus US dollar exchange rate is 0.06 pct higher at 1.3400.
The Australian dollar versus US dollar exchange rate is 0.32 pct higher at 0.9516.
The US dollar versus Canadian dollar exchange rate is 0.03 pct lower at 1.0209.

Please be aware that the above are spot market quotes, your bank will affix their own discretionary spread to the numbers. However, an independent FX provider will guarantee to undercut your bank's offer, thus delivering more currency. Please learn more here.

There is very little consensus on what is expected from the central bank

We now hear from Kathy Lien at BK Asset Management on her predictions for the US dollar today, and indeed, the wider financial markets:

The Federal Reserve will be making one of its special quarterly monetary policy announcements on Wednesday and based on the price action of the currency, equity and bond markets, there is very little consensus on what is expected from the central bank.

While no one expects the Fed to cut interest rates or alter its asset purchase program this week, there's a lot of confusion on what the Fed Chairman could say about their monetary policy intentions going forward.  

Based on the rally in U.S. stocks, equity traders don't except Bernanke to sound overly eager about tapering asset purchases.  Bond traders who initially drove bond yields above 2.2% changed their minds as the day progressed.  Currency traders are just as confused with the dollar weakening against the EUR and CHF and strengthening against the JPY, GBP, AUD and CAD ahead of the Federal Reserve's monetary policy decision.

While there are a number of potential scenarios for today's event, we are focusing on 2 key possibilities.  If Bernanke says tapering does not equal tightening but makes it unambiguously clear that they plan to vary the amount of bonds purchased under their Quantitative Easing program later this year, the dollar should rise. However if Bernanke straddles the fence and spends more time distinguishing the difference between tapering and tightening, the dollar should sell-off as this would suggest that the Fed's eagerness to adjust asset purchases has weakened.  

Based on the rise in bond yields and the volatility in the Treasury market in general, Bernanke may opt to err on the side caution and give the market as little as possible.  Since the central bank last met 10 year Treasury yields increased 50bp from 1.63% to 2.2%. The performance of the U.S. economy has also been mixed.

The following table shows how the economy has changed since May 1st.
   

Overall, consumer spending improved and job growth accelerated but inflation ticked higher on the consumer level and manufacturing plus service sector activity slowed.  Housing market activity is also mixed and taken together, these reports show an uneven but continued recovery in the U.S. economy.  

This is part of the reason why the Fed is predicted to lower its GDP forecasts.  

For the central bank, the pullback in service and manufacturing activity is another reason why Bernanke may want to avoid fueling expectations for Fed tapering and by extension, drive yields even higher.  So while a number of policymakers have said the central bank could taper asset purchases in a few months, the stronger message could be that monetary policy will remain extremely accommodative.