Currencies are trading higher across the board this morning as FX traders wait for fresh news out of Cyprus. Discussions in Russia have yielded very little results so far and according to comments from Germany, the EU won’t let Cyprus off the hook so easily. Angela Merkel said to create sustainability, Cyprus’ banking sector need to contribute to the bailout, which suggests that they are still looking for a deposit levy. Finland’s Europe Minster hopes that a deal will be in place by the weekend, which we think may be a bit optimistic.

Meanwhile the shift turns to this afternoon’s FOMC meeting, which starts with the rate announcement and latest Fed forecasts at 2pm ET followed by a press conference from Bernanke (2:30pm ET). Asset purchases and interest rates are expected to remain unchanged, leaving the market’s focus on the FOMC statement, the forecasts and Bernanke’s comments. Economic data has improved since the last meeting with retail sales jumping 1.1% and non-farm payrolls doubling, concerns about the impact of sequester and deterioration in more recent economic reports also raises red flags about the outlook for the U.S. economy. As a result, Bernanke, the mild manner dove may opt for cautious optimism, which may not be good for the U.S. dollar.

There has been recent speculation that the Fed could begin tapering asset purchases and there’s no doubt in our minds that Bernanke will be asked about their exit strategy by reporters at the press conference. Traders should also beware that the FOMC statement, Fed forecasts and Bernanke’s comments could send mixed messages – it has happened before and could happen again. In this case, the FOMC statement could recognize recent improvements in economic data and contain a more optimistic tone but economic projections and Bernanke’s comments could be more cautious. Previously, the Fed Chairman said the sequester could reduce GDP growth by 0.5%.

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