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Fed in focus as investors seek reassurance

By Paul Day

MADRID (Reuters) - Investors will look to the Federal Reserve for reassurance in the coming week, with little economic data to assuage their concerns over the strength of the global recovery, amid signs Iraq may be sliding into civil war.

The Fed, which wraps up a policy meeting on Wednesday, is expected to keep steadily reducing its massive bond-buying stimulus by $10 billion per month.

Financial markets will be listening out for any hints on when the U.S. central bank might begin raising interest rates.

"The Federal Reserve is preparing to move to the second step of the monetary policy exit. With the tapering of asset purchases virtually on auto pilot – QE3 is projected to end in late summer or early autumn – the focus is gradually shifting towards actual rate hikes," Unicredit said in an investor note.

It said the notion that U.S. monetary policy has reached a turning point could be strengthened if the Fed policymakers' median rate forecast for the end of 2016 stays at 2.25 percent, where it stood in March, up from 1.75 percent in December.

The matrix of dots for when each rate-setter expects policy to begin tightening - and how quickly - will be keenly scrutinised, as will any comments about rate hikes or slack in the economy from Fed Chair Janet Yellen, who speaks after the results of the meeting are released.

While the world's largest economy got off to a weaker than expected start this year, many analysts believe the underlying trend for growth remains solid.

Global stocks are likely to stay on the back foot due to concerns over a growing radical Islamist insurgency in Iraq. U.S. President Barack Obama said he didn't rule out air strikes to help Iraq counter the insurgency, but later said he needed several days to determine how the United States would react.

The escalating violence in Iraq drove oil prices to a nine-month high on Friday.

BOE MINUTES

The monetary policy outlook will also be in focus in Britain after Bank of England Governor Mark Carney stunned the markets by saying rates could rise sooner than financial markets expect.

His comments, which put the British central bank out ahead of the world's other major policy guardians on the monetary tightening front, pushed sterling to near five-year highs against the dollar on Friday.

The Bank publishes the minutes of its June policy meeting on Wednesday, which will be closely watched for signs of any further division among its members on rates, and several of its policymakers will be speaking during the week.

The Bank's new Financial Policy Committee, which has the power to rein in an overheating housing market, meets on Tuesday, although the meeting minutes will not be published for a couple of weeks.

Meanwhile, the ECB's fight against deflation via interest rate cuts and measures aimed at stimulating lending to crisis-hit companies, means few expect further action from it for now.

"The ECB has bought itself some quiet time, maybe for the remainder of this year. It doesn't want to be pushed in to any additional movements before then," economist at Deutsche Bank Gilles Moec said.

There will be few key economic indicators from the euro zone, with the German Zew index for June in focus after better-than-expected industrial output data and rising confidence in the bloc suggesting growth is accelerating in the second quarter.

Bond markets will look to absorb debt supply from Spain, Germany and France after a heavy issuance last week including 9 billion euros of a new 10-year bond from Spain and paper from France, Italy, Germany and Portugal.

Yield-hungry investors will be watching for news of a possible debt sale by Cyprus just a year after it bailed in bank depositors and imposed capital controls. That would make it the last euro zone member that took financial aid to make a market comeback.

The Bank of Japan publishes the minutes of its monthly policy meeting on Friday but is not expected to have moved from an optimistic viewpoint that the country is in the midst of a virtuous cycle of employment and output growth, analysts say.

"There is some support to this theory. The unemployment rate remains very low and job offers to applicants ratios are moving steadily higher. Add to this the slight improvement in cash wages, and the firmer backdrop to the Japanese economy than that prevailing back in 1997," said ING in an investors note.

China will issue foreign direct investment data on Tuesday and house price figures on Wednesday. A slowdown in property inflation is likely to stoke fears about a deepening downturn in the sector. [ID:nL4N0OT14V]

(This story corrects Obama's name in paragraph eight)

(Additional reporting by Gui Qing Koh and Ann Saphir; Editing by Hugh Lawson)

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