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Of all the central banks which until recently dismissed inflation as transitory, one still stands: the Bank of Japan. But it’s increasingly being challenged by hedge funds, which are betting it can’t hold the line on superloose policy forever.

Ears are peeled, too, for any details on the European Central Bank’s plan to prevent rate hikes from hurting weaker euro bloc economies.

And in emerging markets, there’s no let up in rate-hike fever with Indonesia and Mexico among those expected to raise rates, while one major outlier dismisses any need for tightening: Turkey.

Here’s your look at the week ahead in markets:

WHEN DOVES BUY

Exterior of Bank of Japan's headquarters is pictured in Tokyo on June 17.KIM KYUNG-HOON/Reuters

The Bank of Japan has defied the direction of monetary policy globally, sticking with ultra-easy settings and a vow to buy 10-year bonds every day to anchor borrowing costs.

The result is a sliding yen, a yield curve that’s being bent out of shape and a bond market almost buckling in the tussle between hedge funds and policy makers.

Meanwhile, Japanese living costs are rising and as July midterm elections approach, the BOJ may face political pressure to tone down its efforts to raise inflation.

That could intensify if inflation data due on Friday shows above-target price growth for a second month in a row.

PAIN THRESHOLD, HIT

A symphony of light consisting of bars, lines and circles in blue and yellow, the colours of the European Union, illuminates the south facade of the European Central Bank (ECB) headquarters in Frankfurt, Germany, Dec. 30, 2021.WOLFGANG RATTAY/Reuters

The ECB is promising additional support for the euro bloc’s indebted southern rim, looking to calm the angst caused by its policy-tightening plans.

So far, all we know is that the new scheme may attach some loose conditions. Investors, keen to find out what shape and form the tool might take, will be on the prowl for clues.

Bond markets reacted with relief to the ECB’s plan. But investors are an impatient bunch and could soon test its resolve to contain bond market strains.

Having had to reverse course just six days after failing to reassure markets it would keep borrowing costs in check, ECB officials know the clock is ticking.

PMI TIME

A worker at the ThyssenKrupp steel plant in Duisburg, Germany Jan. 30, 2020.WOLFGANG RATTAY/Reuters

Advance readings of June purchasing managers’ indexes (PMIs), due on Thursday, will make for interesting reading, showing how businesses coped with this month’s surge in the cost of capital and a souring in consumer sentiment.

So far this year, European and U.S. PMIs have held above the 50 mark, while Chinese zero-COVID policies dragged Asia into contraction.

Now though, European and U.S. PMIs are going the other way, as higher borrowing costs bite. Economists polled by Reuters expect June PMIs to show further modest weakening.

PMI watchers might choose to train their sight on Asia, where readings nudged higher in May and may do so again this month, as swathes of China emerged from lockdowns and authorities stepped up investment.

And Chinese PMIs’ return to expansionary territory would be a bonus for the global economy.

POINTING TO POWELL

A trader watches U.S. Federal Reserve Chairman Jerome Powell on a screen on the floor at the New York Stock Exchange (NYSE) on March 20, 2019.BRENDAN MCDERMID/Reuters

Fresh off the Federal Reserve’s biggest rate hike in nearly three decades, Fed Chair Jerome Powell will be in the spotlight on Wednesday when he testifies before the Senate Banking Committee.

Blistering inflation forced the Fed to raise interest rates by 75 basis points on June 15 and flag a faster rate-rise path. But it also projected a slowing economy and rising unemployment, highlighting a tricky balancing act ahead.

The testimony will allow Mr. Powell to hammer home his determination to quell inflation. But with the S&P 500 down 20 per cent from January record highs and other asset prices also falling, he may be quizzed for detail on how the Fed can tame inflation without causing too many ructions in the economy and markets.

TWO DECADES OF LIRA WOES

A money changer holds Turkish lira banknotes at a currency exchange office in Ankara, Turkey Oct. 12, 2021.CAGLA GURDOGAN/Reuters

Policy makers at Turkey’s central bank will meet on Thursday to debate where interest rates will go. The answer, though, is already known – nowhere. That means pressure on the lira will increase further.

Despite shrinking FX reserves and inflation above 70 per cent, interest rates are stuck at 14 per cent, owing to President Tayyip Erdogan’s push for lower rates.

Instead, a number of measures – widely seen as failing to address the core problem of soaring inflation – have been introduced to shield locals from the fallout of a currency that has lost some 90 per cent of its value in the past decade.

But in other emerging markets, central banks are not dithering. On Wednesday, Czech rates could rise 100 basis points ; Indonesia may kick off its tightening cycle on Thursday; later that day, Mexico could raise rates by 75 basis points while Egypt may continue hiking after last month’s 200 basis-point move.

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