The euro has managed to make some encouraging gains this morning on the back of comments from the EU's Barosso promising coordinated action by member states to recapitalise banks. With many investors worried that a Greek default is becoming an increasingly possible scenario, panic has been fuelled by the assumption that such an event would have a catastrophic knock-on effect within the European financial system. Whilst a Greek default would still cause an appreciable shock to the markets if it were to take place, the efforts to limit a domino of bank collapses has come as a welcome development.   As positive as the bank recapitalisation news is, investors are unlikely to get too carried away with optimism before we get through today's headline event, the ECB rate meeting. Surveys suggest that a majority of analysts believe the repo rate will be kept on hold at 1.50%; however there are growing murmurs from some observers that Trichet and his colleagues may choose to cut by 25bps or even 50bps. The economic data coming out of the Eurozone and Germany clearly highlights a worrying downward trend towards recession, which has obviously provoked the calls for aggressive cuts, however we agree with the consensus prediction that no cuts will materialize. For one thing, last Friday's Eurozone flash estimate of CPI came in significantly stronger at 3.0% YoY; a fact that should give council members good reason to delay pulling the trigger. We also believe that the surprise increase in inflation coupled with the ECB's track record for stubbornly addressing price stability leaves us vulnerable to the possibility of a more hawkish statement than the market is currently anticipating. Given the prevailing troubles in Greece, we do believe the ECB will lower policy rates in December, but this meeting should be more focused on loosening non-standard measures. In addition this will be Trichet's last meeting as the ECB chairman, so it will be interesting to see if he sets a clear course for the ECB's next few months before Mario Draghi officially takes the reins.   While the ECB is garnering most of the attention today, it will be important not to underestimate the event risk ahead of today's other major central bank meeting just beforehand. The Bank of England monetary policy meeting is due at 11:00 GMT, and whilst interest rates are expected to remain unchanged at 0.50%, there is considerable speculation that the Monetary Policy Committee (MPC) may increase the asset purchase target from GBP 200bn. At the last meeting Adam Posen was the only member to formally vote in favour of further quantitative easing, but the recent minutes revealed that the same decision was actually very finely balanced for a number of others. BoE member Broadbent certainly falls into that category, as he declared recently that more asset purchases in the current environment would be beneficial for the banking system and UK growth. Of course, the key obstacle for members leaning towards QE is satisfying the doubt that stimulating growth in this way would be worth the cost of fanning CPI higher when it is already soaring at 4.5% YoY. If more asset purchases were to be announced, it is very likely that we'd see GBP under pressure; however with possible rate cuts looming in the Eurozone, any knee jerk reaction from EURGBP that takes it higher might provide a nice opportunity to sell.
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