FOMC to further reduce QE by USD10bn but potential for surprises in statement

• UK consumers borrow less, though mortgage approvals higher in Eurozone

• Industrial sentiment likely to show weakness given Euro strength

• US jobs and GDP in focus ahead of the FOMC meeting

• FOMC could have hawkish dissenter or change in language

The pound came under pressure yesterday as weaker consumer credit figures (GBP420m compared with forecasts of GBP800m) negated stronger mortgage data. In an ideal world, the drop in consumer borrowing could have been a positive sign of improving employment and wage figures boosting income and reducing borrowing, but in reality it appears to be a retrenchment of spending on the basis of expected interest rate hikes, and suggests that we are likely to see a slowdown in consumer spending.

On the flip side, the mortgage approvals surprisingly jumped up 8% on the May figure to 67,200, following steady falls over the course of the year. This suggests that the slowdown in approvals since stricter lending criteria were introduced in April could be at an end. The downtrend could well have been a bottleneck as a result of this extra time for additional checks on lending which would allow continued increases in mortgage approvals. Given the comments yesterday from the IMF and the continued increase in house prices, this is certainly something the MPC will have to consider at its next meeting.

In a heavy European calendar this morning, we have business and consumer confidence, Industrial Production and Inflation from a range of countries, including German inflation. This is expected to show continuing weak inflation with a 0.8% forecast which would mark a resumption of the weak figures following from last month's surprise at 1.0%. We also have business confidence for the Eurozone, which has been fairly steady since the beginning of the year and is expected to continue on the low side for 2014. There are also industrial and economic sentiment numbers that are likely to show softening of industrial conditions, in part due to the strength of the single currency.

We have seen a general trend of US dollar strength on positive data and risk aversion as the Russia and Israel situations rumble on. Yesterday afternoon, the Case-Shiller House prices continued the run of poor housing market data, with an annual rise of 9.3% below the forecast 10%. The consumer confidence figures were, however, much stronger than expected - showing an increase from 86.4 last month up to 90.9 for July likely helped by jobs data that continues to paint a positive picture of the US labour market. This afternoon we will see the ADP employment figure which is expected to soften from last month's surprising spike up to 281,000, rising by a more moderate 230,000. Even at this level, the jobs market continues to look positive ahead of the non-farms figure on Friday. We will also be treated to US GDP growth which is expected to bounce back from last month's disappointing -2.9%.

All of this will be overshadowed by the Fed decision at 7pm where the widely expected outcome will be a further reduction of $10bn of asset purchases to $25bn, with $5bn off treasuries and $5bn off MBS. Any surprise could come following the decision in the form of the statement. Yellen has recently commented that the economy continues to improve more quickly than anticipated, and if this continues then rates will have to move sooner and more sharply than is currently expected. This doesn't really square with the latest language from the FOMC that it will maintain the current target rate for a considerable time, suggesting the risk of a hawkish change in the language used this evening. There is also some risk that we see a dissenter, with Dallas Fed president Richard Fisher the most liklely candidate following his comments several weeks ago that he is at odds with some of the policymakers over the reduction in QE, the Fed's balance sheet and in the timing of a rise in rates.

Overnight we had Japanese industrial production expected to show a fall of 1.1% month on month but actually showing a drop of 3.3% which makes it five months of consecutive falls and continues to show cracks in the Japanese stimulus targets following yesterday's export numbers.

Further sanctions were announced over the course of the yesterday with EU governments agreeing to bar Russian state-owned banks from selling shares or bonds in Europe, and restricting exports to Russia of arms or technology that would improve the oil industry. The US treasury also announced further sanctions against a number of banks. Russia cancelled a weekly bond auction yesterday, citing apparently unfavourable market conditions, highlighting the stresses that are starting to appear.

Have a great day.