By Kevin Buckland

TOKYO (Reuters) - The dollar hovered close to a two-week high versus the euro on Wednesday, while the yen consolidated near the middle of its range this month as traders awaited crucial policy decisions from the nations' central banks this week. The Australian dollar slid after benign inflation data suggested the Reserve Bank of Australia would forgo a rate hike next week.

The U.S. dollar index - which measures the currency against six major peers, but is heavily weighted toward the euro - edged 0.06% higher to 101.37 in the Asian morning, after pushing as high as 101.65 overnight for the first time since July 11.

The euro slipped 0.16% to $1.1042, bringing it close to the previous session's low of $1.1036, a level last seen on July 12.

Continued signs of a resilient U.S. economy in the face of the Federal Open Market Committee's (FOMC) steep series of interest rate increases has helped buoy the dollar index from a 15-month trough of 99.549 reached a week ago.

In the latest data, U.S. consumer confidence increased to a two-year high in July amid a persistently tight labor market and receding inflation.

Money market traders see a quarter point hike from the U.S. Federal Reserve on Wednesday as a near certainty, but are split on the odds of another later in the year, putting it at more or less a coin toss.

Meanwhile, the European Central Bank sets policy on Thursday. Again, a quarter point hike is widely expected, but building evidence of an economic slowdown has called into question the chances of another by year end.

"Given the deceleration in underlying inflation, we think the risk is (Fed Chair Jerome) Powell cools on another hike by describing the FOMC as 'data dependent,'" which would pressure the dollar, said Joseph Capurso, a strategist at Commonwealth Bank of Australia (OTC:CMWAY).

"If the ECB retain their hawkish bias, by no means guaranteed but more likely than the FOMC, EUR is likely to track higher this week."

The Bank of Japan sets policy on Friday, and speculation for a hawkish tweak to the yield curve control (YCC), which had soared earlier in the month, has steadily receded over recent days.

The dollar added 0.12% to 141.15 yen on Wednesday, following a rebound from a multi-week low of 137.245 mid-month.

The Australian dollar slid 0.63% to $0.67505 after inflation slowed more than expected in the June, suggesting less pressure for another hike in interest rates for the central bank on Aug. 1.

That unwound most of the Aussie's 0.79% gain of the previous day, after Beijing announced stimulus, lifting the economic outlook for Australia's key trading partner.

"Just when it looked safe to get back in the water with Aussie longs on the China sentiment rebound, the downside surprise on inflation casts fresh doubt on the extent of further RBA tightening needed," said Sean Callow, a strategist at Westpac, predicting the currency would drop below $0.67 near term.

By Lucia Mutikani

WASHINGTON (Reuters) - U.S. consumer confidence increased to a two-year high in July amid a persistently tight labor market and receding inflation, bolstering the economy's prospects in the near term.

But the economy is not out of the woods, with the survey from the Conference Board on Tuesday offering mixed signals. Consumers remain fearful of a recession over the next year following hefty interest rate hikes from the Federal Reserve.

While more consumers planned to buy a motor vehicle or house in the next six months, fewer anticipated purchasing major household appliances like refrigerators and washing machines.

Consumers also continued to report that they intended to spend less on discretionary services, including travel, recreation and gambling. They, however, expected to increase spending on healthcare, as well as streaming services from home.

That supports economists' views that consumer spending was flattening out after rising at its fastest pace in two years in the first quarter. Still, the survey joined data on inflation, the housing market and retail sales in raising optimism that the economy could skirt a recession this year.

"We seem to be in an unusual eddy in this expansion, with consumer confidence up but consumer spending clearly leveled off," said Robert Frick, corporate economist with Navy Federal Credit Union in Vienna, Virginia. "Lower inflation is why confidence has surged, but Americans have become cautious, trimming spending and increasing savings."

The Conference Board's consumer confidence index increased to 117 this month, the highest reading since July 2021, from 110.1 in June. Economists polled by Reuters had expected the index to increase to 111.8.

The improvement in confidence was across all age groups, with the largest increase among consumers aged 35 and below. Confidence was higher among consumers with annual incomes below $50,000 as well as those making more than $100,000.

Consumers' perceptions of the likelihood of a recession over the next year rose, but stayed below the recent peak earlier in the year. About 70.6% of consumers this month said a recession was "somewhat" or "very likely," up from 69.9% in June.

The share expecting better business conditions over the next six months was the highest since January.

The survey was published as Fed officials started a two-day policy meeting. The U.S. central bank is expected to raise interest rates by 25 basis points on Wednesday after keeping borrowing costs steady in June. The Fed has raised its policy rate by 500 basis points since March 2022.

Stocks on Wall Street were trading higher. The dollar was little changed against a basket of currencies. U.S. Treasury prices fell.

TIGHT LABOR MARKET

"This likely reveals consumers' belief that labor market conditions will remain favorable," said Dana Peterson, the Conference Board's chief economist.

The survey's so-called labor market differential, derived from data on respondents' views on whether jobs are plentiful or hard to get, widened to 37.2 this month from 32.8 in June, a sign labor market conditions remain tight despite job growth slowing. This measure correlates to the unemployment rate in the Labor Department's closely followed employment report.

Consumers' 12-month inflation expectations slipped to 5.7%, the lowest reading since November 2020, from 5.8% last month.

The improvement in inflation expectations was, however, not enough to convince more consumers to make big-ticket purchases over the next six months. And while more households planned to buy houses, they could run into affordability challenges.

House prices have resumed their upward trend because of tight supply after earlier slowdowns and outright declines in some regions as higher mortgage rates depressed demand. With the labor market still resilient, demand for housing is rising again. But many homeowners have mortgage loans with rates below 5%, reducing the incentive to put their houses on the market.

A separate report from the Federal Housing Finance Agency on Tuesday showed monthly house prices rising 0.7% in May after increasing by the same margin in April. Prices climbed 2.8% in the 12 months through May after advancing 3.1% in April.

"Low inventory and surprisingly resilient housing demand have kept home prices stable or rising in many markets," said Lisa Sturtevant, chief economist at Bright MLS in Alexandria, Virginia.

"But we are going to hit an affordability ceiling in many places which will happen just as more inventory begins to come on line later this year. As a result, it's possible that the 'bottoming out' of home prices is just the first half of a 'W-shaped' pattern in the market."

By Andrea Shalal

WASHINGTON (Reuters) - The International Monetary Fund on Tuesday raised its 2023 global growth estimates slightly given resilient economic activity in the first quarter, but warned that persistent challenges were dampening the medium-term outlook.

The IMF in its latest World Economic Outlook said inflation was coming down and acute stress in the banking sector had receded, but the balance of risks facing the global economy remained tilted to the downside and credit was tight.

The global lender said it now projected global real GDP growth of 3.0% in 2023, up 0.2 percentage point from its April forecast, but left its outlook for 2024 unchanged, also at 3.0%.

The 2023-2024 growth forecast remains weak by historical standards, well below the annual average of 3.8% seen in 2000-2019, largely due to weaker manufacturing in advanced economies, and it could stay at that level for years.

"We're on track, but we're not out of the woods," IMF chief economist Pierre-Olivier Gourinchas told Reuters in an interview, noting that the upgrade was driven largely by first-quarter results. "What we are seeing when we look five years out is actually close to 3.0%, maybe a little bit above 3.0%. This is a significant slowdown compared to what we had pre-COVID."

This was also related to the aging of the global population, especially in countries like China, Germany and Japan, he said. New technologies could boost productivity in coming years, but that in turn could be disruptive to labor markets.

The outlook is "broadly stable" in emerging market and developing economies for 2023-2024, with growth of 4.0% expected in 2023 and 4.1% in 2024, the IMF said. But it noted that credit availability is tight and there was a risk that debt distress could spread to a wider group of economies.

The world is in a better place now, the IMF said, noting the World Health Organization's decision to end the global health emergency surrounding COVID-19, and with shipping costs and delivery times now back to pre-pandemic levels.

"But forces that hindered growth in 2022 persist," the IMF said, citing still-high inflation that was eroding household buying power, higher interest rates that have raised the cost of borrowing and tighter access to credit as a result of the banking strains that emerged in March.

"International trade and indicators of demand and production in manufacturing all point to further weakness," the IMF said, noting that excess savings built up during the pandemic are declining in advanced economies, especially in the United States, implying "a slimmer buffer to protect against shocks."

While immediate concerns about the health of the banking sector - which were more acute in April - had subsided, financial sector turbulence could resume as markets adjust to further tightening by central banks, it said.

The impact of higher interest rates was especially evident in poorer countries, driving debt costs higher and limiting room for priority investments. As a result, output losses compared with pre-pandemic forecasts remain large, especially for the world’s poorest nations, the IMF said.

LOWER INFLATION

The IMF forecast that global headline inflation would fall to 6.8% in 2023 from 8.7% in 2022, dropping to 5.2% in 2024, but core inflation would decline more gradually, reaching 6.0% in 2023 from 6.5% in 2022 and easing to 4.7% in 2024.

Gourinchas told Reuters it could take until the end of 2024 or early 2025 until inflation came down to central bankers' targets and the current cycle of monetary tightening would end.

The IMF warned that inflation could rise if the war in Ukraine intensified, citing concern about Russia's withdrawal from the Black Sea grain initiative, or if more extreme temperature increases caused by the El Nino weather pattern pushed up commodity prices. That in turn could trigger further rate hikes.

The IMF said world trade growth is declining and will reach just 2.0% in 2023 before rising to 3.7% in 2024, but both growth rates are well below the 5.2% clocked in 2022.

The IMF raised its outlook for the United States, the world's largest economy, forecasting growth of 1.8% in 2023 versus 1.6% in April as labor markets remained strong.

It left its forecast for growth in China, the world's second-largest economy, unchanged at 5.2% in 2023 and 4.5% in 2024. But it warned that China's recovery was underperforming, and a deeper contraction in the real estate sector remained a risk.

The fund cut its outlook for Germany, now forecast to contract 0.3% in 2023 versus a 0.1% contraction in April, but sharply upgraded its forecast for the UK, now expected to grow 0.4% versus a 0.3% contraction forecast in April.

Euro zone countries are expected to grow 0.9% in 2023 and 1.5% in 2024, both up 0.1 percentage point from April.

Japan's growth was also revised upward by 0.1 percentage point to 1.4% in 2023, but the IMF left its outlook for 2024 unchanged at 1.0%.

INTEREST RATES STILL RISING

The rise in central bank policy rates to fight inflation continues to weigh on economic activity, the IMF said, adding that the U.S. Federal Reserve and the Bank of England were expected to raise rates by more than assumed in April, before cutting rates next year.

It said central banks should remain focused on fighting inflation, strengthening financial supervision and risk monitoring. If further strains appeared, countries should provide liquidity quickly, it said.

The fund also advised countries to build fiscal buffers to gird for further shocks and ensure support for the most vulnerable.

"We have to be very vigilant on the health of the financial sector ... because we could have something that basically seizes up very quickly," Gourinchas said. "There is always a risk that if financial conditions tighten, that can have a disproportionate effect on emerging market and developing economies."

The IMF said unfavorable inflation data could trigger a sudden rise in market expectations regarding interest rates, which could further tighten financial conditions, putting stress on banks and nonbank institutions - especially those exposed to commercial real estate.

"Contagion effects are possible, and a flight to safety, with an attendant appreciation of reserve currencies, would trigger negative ripple effects for global trade and growth," the IMF said.

Fragmentation of the global economy given the war in Ukraine and other geopolitical tensions remained another key risk, especially for developing economies, Gourinchas said. This could lead to more restrictions on trade, especially in strategic goods such as critical minerals, cross-border movements of capital, technology and workers, and international payments.

(Reuters) - New U.S. light vehicle sales volumes are set to rise again in July as easing supply-chain snags help automakers ramp up production to meet pent-up demand, automotive research firm S&P Global (NYSE:SPGI) Mobility said on Monday.

S&P projects new light vehicle sales to reach 1.33 million units in July, up 18% year-over-year. It also upgraded the 2023 U.S. light vehicle sales forecast to 15.4 million units, from 15.1 million estimated earlier.

Top global automakers have reported a rise in second-quarter new vehicle sales on improving supply and strong demand, signaling that rising interest rates are yet to have a meaningful impact on purchases.

"New light vehicle sales will continue to progress in July, reflecting the current trend of sustained demand levels to the fleet sector while retail sales continue to climb," said Chris Hopson, principal analyst at S&P Global Mobility.

In the second half of the year, however, high inflation could lead to affordability issues while production advances build up inventory quicker than anticipated, S&P said.

A look at the day ahead in European and global markets from Tom Westbrook

Earnings and hope for a turning in China's markets are the prelude to this week's big central bank decisions.

Microsoft (NASDAQ:MSFT), Google parent Alphabet (NASDAQ:GOOGL), Visa (NYSE:V), recruiter Robert Half (NYSE:RHI), General Electric (NYSE:GE), 3M, Dow, chipmaker Texas Instruments (NASDAQ:TXN) and grain dealer Archer-Daniel Midlands are among the heavyweights and highlights in the United States.

Unilever (NYSE:UL), LVMH and EssilorLuxottica report in London and Paris.

The corporate performance and outlook risk disappointing markets that are increasingly priced for a "soft-landing" slowdown in both growth and inflation.

In the Asia session investors cheered pledges of support in the readout from an earlier-than-expected Politburo meeting in China -- though not too loudly.

Property stocks in Hong Kong surged, only they had spent much of the past week or two descending deeper into the discount cellar so gains came from a low base. The Hang Seng rose about 3% and the Shanghai Composite roughly 2%, but neither is roaring out of recent ranges.

The yuan jumped, but it had help from China's state banks, which sources said were buying onshore and offshore early in the Asian day.

Morgan Stanley (NYSE:MS) analysts made much of the absence in the readout of a familiar line that "property is for living not for speculation" and the addition of a pledge to "optimise" policy.

"Investors should recall that the early stage of COVID easing was labelled as 'optimised' policy, which led to a complete change of the policy later," they wrote. Traders are buying it today, but may not do so tomorrow while a cash crunch looms over giant names like Country Garden and Dalian Wanda.

The Eurozone bank lending survey is also out on Tuesday and can give a view on the health of borrowing ahead of Fed and European Central Bank meetings, which are both expected to deliver rate hikes.

The yen was steady in Asia as investors weigh whether the Bank of Japan will tweak policy on Friday.

Key developments that could influence markets on Tuesday:

Economic events: German LFO surveys, Eurozone bank lending survey

Earnings: Unilever, EssilorLuxottica, LVMH, Danaher (NYSE:DHR), Microsoft, Alphabet, Texas Instruments, Verizon (NYSE:VZ), Visa, General Electric, General Motors (NYSE:GM), 3M, ADM, Spotify (NYSE:SPOT), Snap (NYSE:SNAP), Dow

By Rae Wee

SINGAPORE (Reuters) - The euro hit a two-week low on Tuesday as a worsening downturn in euro zone business muddied the bloc's rate outlook against a still-hawkish European Central Bank (ECB), while the dollar rose ahead of this week's trio of major central bank meetings.

The offshore yuan strengthened in early Asia trade, following comments from China's top leaders on Monday pledging to step up policy support for its flailing economy.

The euro was shaky at $1.1063, up just 0.02% having slumped to a two-week low of $1.1059 earlier in the session, after a survey on Monday showed euro zone business activity shrank much more than expected in July, reigniting recession fears.

The single currency had slid more than 0.5% in the previous session.

"The extension of the weakness in the manufacturing sector as well as services, and Germany, in particular, being a lot weaker than expected ... that's putting some question marks around the rhetoric that we should expect from the ECB on Thursday," said Rodrigo Catril, senior currency strategist at National Australia Bank (OTC:NABZY) (NAB).

Markets have fully priced in a 25-basis-point rate hike by the ECB at its meeting this week, though the path of future rate increases beyond July remains up in the air.

Elsewhere, sterling fell 0.11% to $1.2811, while the U.S. dollar index steadied at 101.39.

Flash PMI survey similarly out in the UK on Monday showed Britain's private sector growing at its weakest pace in six months in July, while a separate survey pointed to U.S. business activity slowing to a five-month low this month.

The Federal Reserve also meets this week and is expected to deliver a 25 bp rate hike, with a majority of economists polled by Reuters expecting that to mark the last increase of the central bank's current tightening cycle.

"While the Fed meeting (in July) is likely to be uncontroversial in terms of the decision on interest rates, the Fed's statement and the press conference will be extremely relevant for markets," said Guillermo Felices, global investment strategist at PGIM Fixed Income.

"Incoming activity data has been stronger than expected in June and July," he said. "The Fed will have to explain what they make of the resilient U.S. economy."

The yen remained under pressure at 141.43 per dollar, struggling to recover from its heavy losses on Friday on a Reuters report that the Bank of Japan is leaning towards keeping its yield control policy unchanged at this week's policy meeting.

The offshore yuan rose nearly 0.5% to 7.1540 per dollar, with investors encouraged by comments from China's top leaders at the closely-watched Politburo meeting signalling more support for its weakening economy, though many were still seeking out specific details on greater stimulus measures.

"We view the assessment of the economic growth situation and description around the property market as slightly more dovish than expected, though we still await specific easing measures after (the) statement," said analysts at Goldman Sachs (NYSE:GS) in a note.

"We continue to expect a combination of monetary, fiscal, property and consumption support measures to be rolled out in the next few months."

The Australian dollar, often used as a liquid proxy for the yuan, gained 0.18% to $0.67515, while the kiwi rose 0.06% to $0.6209.

By Jihoon Lee

SEOUL (Reuters) -South Korea's economy sped up faster than expected in the second quarter, flattered by headline improvements in trade although weaker consumer and business spending add to the case for the central bank to loosen its restrictive monetary policy.

Gross domestic product (GDP) grew by a seasonally adjusted 0.6% in April-June on a quarterly basis, according to preliminary estimates from the Bank of Korea, after a 0.3% increase in the preceding three months.

It beat the median 0.5% rise forecast in a Reuters survey of economists and marked the biggest quarterly growth since the second quarter of 2022.

By expenditure, exports fell 1.8%, but imports dropped at a much faster rate of 4.2%, bringing a net growth contribution of positive 1.3 percentage points to the heavily trade-reliant economy.

"Qualitatively, it is not so positive as the headline figure indicates," said Park Sang-hyun, chief economist at HI Investment Securities.

"Growth will improve going forward, but it is too early to talk about recovery, as a sluggish Chinese economy may delay the recovery of exports that are already weaker than previously expected."

Private consumption as well as facility and construction investments were all weaker than the quarter before, down 0.1%, 0.2% and 0.3%, respectively, while government spending dropped 1.9%, the biggest since early 1997.

GDP for the quarter was 0.9% higher than the same quarter the year before, compared with an expansion of 0.9% in the January-March quarter and a 0.8% increase expected by economists.

Asia's fourth-largest economy is expected to grow 1.4% in 2023, down from 2.6% in 2022, according to the latest forecasts by the central bank and the government.

"The upshot is that the central bank, enabled by falling inflation, is likely to step in to support the economy by loosening monetary policy in the coming months," said Shivaan Tandon, emerging Asia economist at Capital Economics.

By Hernan Nessi and Jorgelina do Rosario

BUENOS AIRES/LONDON (Reuters) -Argentina on Monday set new weaker trade-related exchange rates while keeping the official peso rate stable, in a push to meet expectations in its $44 billion agreement with the International Monetary Fund while avoiding a politically costly devaluation.

Corn exporters will be able to sell their goods abroad at 340 pesos per U.S. dollar, according to a government decree, a temporary rate to bolster exports until Aug. 31. That is about 27% weaker than the current rate of 268 pesos per dollar, which remained unchanged.

The government will also introduce a 7.5% tax on some goods imports and a 25% levy on imports of most services, with new FX rates at around 288 and 335 pesos per dollar, respectively, according to a government official.

The move comes as the country faces delayed talks with the IMF on the fifth review of a $44 billion program, which was scheduled for June.

The measure is a "half-way point between the devaluation requested by the IMF and the political order not to devalue during an election year," said Roberto Geretto, an economist at Fundcorp.

Argentina's government is grappling with an annual inflation rate of over 100% which a wider devaluation would exacerbate.

"The fiscal devaluation improves Treasury revenues and helps save reserves," Geretto added, but there are still "points to resolve" in negotiations. Both parties have said a deal is close, but an agreement is not finalized yet.

The country's overseas bonds climbed as much as 1.4 cents on the dollar, according to MarketAxess data. The 2035 dollar note is trading at 31.8 cents, its highest level since January 2022, although still at deeply distressed levels.

An IMF spokesperson said the measures announced by the Argentine authorities are "positive to strengthen reserves and consolidate the path of fiscal order, fundamental variables to strengthen economic stability."

'BIG PACKAGE OF DISBURSEMENTS'

Argentina faces maturities with the IMF worth some $3.4 billion between July and August, at a time when the central bank's net reserves are about $6.5 billion in the red.

Buenos Aires is hoping to alter the economic goals it had agreed with the global lender and bring forward some IMF disbursements scheduled for this year as it battles a severe financial crisis which a lack of reserves could exacerbate.

An economy ministry source told Reuters the disbursement program for the second half of 2023 has been agreed and the staff level agreement could be sealed on Wednesday or Thursday.

Economy Minister Sergio Massa, who is running for president ahead of an August primary vote, said on Sunday in an interview with a local TV network that there is a "big package of disbursements" in August and November under the IMF program, without providing any further details.

Under the current program, the country is expected to get $4 billion in July, more than $3.3 billion in September and another $3.3 billion in December. These disbursements are set to mainly repay a failed 2018 bailout.

Argentina, which is also struggling with a significant fiscal deficit, has suffered a considerable hit to its foreign currency income due to a severe drought which crimped farm output, its principal source of exports.

LONDON (Reuters) - British Prime Minister Rishi Sunak will commit to a promise to build 1 million homes by the next national election, tackling a lack of housing stock that has alienated some younger voters who are often forced to pay high rents and are unable to buy.

Before an election expected next year, Sunak's governing Conservatives have witnessed a collapse of support among younger voters, who are frustrated at being priced out of owning their own homes and are struggling with high childcare costs.

Housing has long been a contentious area for the Conservatives, who are divided between some lawmakers in rural areas who do not want to see an increase in building and want to protect greenbelt protected land, and between those in more urban regions, who want to see more homes built quickly.

Housing minister Michael Gove will set out further measures on Monday to unblock the planning system and build homes in the "right places" where there is local consent to reach the 1 million target that was set out at the 2019 election.

Sunak said his government would concentrate on building in inner-city areas where demand was highest, including a new urban quarter in Cambridge to boost its role as a science hub.

"Today I can confirm that we will meet our manifesto commitment to build 1 million homes over this parliament. That's a beautiful new home for a million individual families in every corner of our country," Sunak said, using a term that refers to the time between the 2019 election and the next vote.

"We won't do that by concreting over the countryside - our plan is to build the right homes where there is the most need and where there is local support, in the heart of Britain’s great cities," he said in a statement.

The housing plan is the latest attempt by Sunak to reduce the opposition Labour Party's large poll lead after an unexpected victory in a so-called by-election just outside central London on Friday offered him some breathing space.

In June, British house building at the sharpest pace in more than 14 years apart from two months early in the COVID-19 pandemic, as higher borrowing costs dampened demand and weighed on the broader construction sector, a survey said this month.

Earlier this month, a parliamentary committee said the government was on track to deliver 1 million new homes, but was not forecast to deliver another promise to build 300,000 net new homes per year by the mid-2020s, largely because of uncertainty over planning policy reform.

By Naomi Rovnick and Stefano Rebaudo

LONDON (Reuters) - The European Central Bank looks set to pull the rate-hike trigger on Thursday, but what it will do after July is less certain and financial markets are craving some guidance.

Euro zone interest rates have risen 400 basis points in the last year to 3.5%, their highest in 22 years, and are now close to peaking as headline inflation cools and the economy weakens.

"The difference (from past meetings) is that until now they've given at least quite precise guidance vis-a-vis the next meeting," said Barclays (LON:BARC) head of European economics research Silvia Ardagna. "And we expect that to become more loose."

Here are five key questions for markets.

1/ How much will the ECB hike rates?

A quarter percentage point increase to 3.75% is priced in by markets and forecast by economists.

Headline inflation is cooling but remains high enough to justify a modest increase. The ECB has flagged a July move.

    "The ECB will hike again and anything else would be a major surprise," said RBC Capital Markets global macro strategist Peter Schaffrik.

2/ What signals is the ECB likely to send about future policy?

Market consensus for one more hike after July is no longer rock solid after some ECB hawks suggested that a September rise is not certain, so the ECB could turn more cautious in its signalling, while confirming it will be data dependent.

"(ECB President Christine) Lagarde will stress uncertainty and conditionality (when and if she mentions further tightening)," said Massimiliano Maxia, senior fixed income specialist at Allianz (ETR:ALVG) Global Investors.

Some analysts expect the ECB to pause in September, when updated staff forecasts will give it an opportunity to signal that inflation is set to reach its 2% target.

They added that they wouldn't be surprised if the ECB paused then and hiked later if needed, as the U.S. Federal Reserve has done. Money markets price in one more hike after July, suggesting rates will peak at around 4%.

3/ When does the ECB expect core inflation to fall?

While headline inflation fell for a third straight month in June, so-called core prices, such as those for services, have risen stubbornly and are not expected to relent soon.

Core inflation, seen as a better gauge of the underlying trend, only edged lower to 6.8% from 6.9% - far from the sustained drop rate-setters want to see.

ECB chief Lagarde will likely be pressed on this question but may not give too much away before September's fresh economic projections.

"Underlying inflation will be very, very slow to come down so this is a worry for the ECB," said UBS chief European economist Reinhard Cluse, noting a tight labour market and wage pressures.

4/ What does a weakening economy mean for policy?

Well, rate-setters have reiterated that the main focus remains inflation, even if monetary tightening hurts the economy.

"I think (the weakening of the economy) will have minimal impact on monetary policy," said Ruben Segura-Cayuela, Europe economist at BofA. "What matters for the September meeting will be core inflation."

Still, slowing growth could strengthen the hands of doves. Euro zone business activity stalled in June as a manufacturing recession deepened and a previously resilient services sector barely grew.

BofA reckons the ECB's forecasts are too optimistic; Barclays expects a stagnation for several quarters starting from the second half of 2023.

5/ What impact is tighter policy having on financing conditions?

Bank lending data suggests the steepest surge in borrowing costs in the ECB's history has started to take a toll on credit conditions and latest numbers on July 25 are in focus.

The ECB's chief economist Philip Lane says loan volumes have weakened sharply and that this may generate a "substantial" decline in economic output.

This dovish message, if reinforced by latest bank lending data, may fuel speculation that rates are close to peaking.

"The peak impact of tightening financing conditions is going to be at the end of this year and the first half of 2024. So a lot of the effect still has to come," said BofA's Segura-Cayuela.