Tomorrow's Federal Reserve monetary policy meeting is not just any usual FOMC meeting because it will also be the last one chaired by Alan Greenspan.  Over the past 18 1/2 years, Greenspan has built such an aura of confidence and respect that even if things turn sour; the market believed that the world's most famous and respected central banker would bail them out, as he has done so often in the past.  However, after 2:15pm EST tomorrow, the US economy and perhaps the world economy will have to place its trust on a new man, Ben Bernanke.  We think that Richard Berner of Morgan Stanley put it best - he said that the most important thing Greenspan "will take with him will be the nearly 18 1/2 years of confidence that he has earned in the financial markets.  Ben Bernanke walks in the next day as a very smart and talented man -- but with a clean slate on the confidence front."  As he and many other analysts have noted before, 'financial markets have an uncanny knack of quickly testing a new Fed chairman."   

Quarter Point Hike Written In Stone, But What About the Statement?

A quarter point interest rate hike to 4.50 percent has been completely priced into the market and there should no suspicions otherwise.  Although fourth quarter GDP data has illustrated the fragility of the US economy, low jobless claims figures, increasing durable goods orders and high energy prices will tempt Greenspan to make his thirteenth consecutive interest rate hike.  Where the uncertainty lies and what could deliver some market volatility will be the potential changes to statement.  The $100 million dollar question will be if the statement becomes more neutral, hawkish or dovish:

More Neutral Statement > Slightly Dollar Bearish

The most likely scenario is for a more neutral FOMC statement with less guidance.  There are two full months before the next Fed meeting, which means that a lot can change between now and March 28.  Greenspan will not only want to leave the Fed with the flexibility to respond to changing economic data, but also leave Bernanke the flexibility to do as he deems fit with monetary policy.  A sign of a more neutral statement would be if the Fed dropped the phrase "some further measured policy firming is likely to be needed" and puts further tightening more contingent upon economic data. If this is the case, although unsurprising, it would be taken as slightly dollar bearish because it fails to acknowledge the market's expectation for a 70 percent plus probability of a March 28 rate hike.

Hawkish Statement > Dollar Bullish

Given the market's high expectations for a March rate hike, there are some economists who believe the statement could retain its hawkish bias.  The ever so astute Fed knows what the market has priced in and may not want to rock the boat because it could deliver a significant amount of unwanted volatility.  There is still a lot of economic data due for release that needs to be assessed to determine the true health of the US economy.  Just this week alone, expectations are for data to improve across the board in terms of consumer confidence, manufacturing sector activity and non-farm payrolls.  The past few weeks of jobless claims have been very optimistic, so even though we think Friday's 250k non-farm payrolls forecast is priced for perfection, it is not out of the realm of possibility.  If the Fed leaves the statement intact, validating a March rate hike, the market could perceive the lack of a change as dollar bullish since not everyone has priced in the possibility of 4.75 percent rates.

Dovish Statement > Very Dollar Bearish

Should the statement be a bit less optimistic on the other hand, the market could assume this to be the Fed's last interest rate hike, which would be very dollar bearish.  This is not impossible since fourth quarter GDP growth at 1.1 percent is extremely weak at and whether we like it or not, there are signs of a gradual slowdown in the housing market.  There are also many risks ahead for Bernanke.  Both the economic and inflation environment are far more uncertain than has been in the past.  Energy prices are rising but core consumer price growth remains weak.  Although the least likely scenario, should the Fed remove any wording about future policy firming or issue warnings about growth, the market may perceive it as the last bout of tightening, which would be taken as very dollar bearish. 

Ultimately, a more neutral statement with less guidance is probably what we will see.  Even if the FOMC rate decision is a non-event, there is so much economic data due for release this week that it will be hard for the currency market to stick to range trading.  Furthermore, the historical event does not end at tomorrow's Fed meeting.  Following in the footsteps of Greenspan will not be easy especially since most traders in the markets have only known of one Fed Chairman.  The economy faces many risks at a time where strong economic growth is far from certain.  Bernanke has a lot to prove and judging from how the market tested the resolve of the ECB when the Euro was first launched, they may be ready to test the resolve of the US' new central banker.

Kathy Lien is the Chief Currency Strategist at FXCM.