Nervousness has been increasing in the European session this morning.  Stock markets are giving back their early gains and EUR/USD has retreated from its morning high of 1.4593 back to the 1.4540 area.  The publication of the ECB's Monthly Report this morning was in line with the cautious tone of ECB President Trichet last week.  The UK Nationwide house price index at +0.8% m/m in Aug is suggestive of stabilisation in the sector.  The big focus of the session is the 11 GMT policy announcement from the BoE. 

The majority of analysts expect that the Bank of England will leave policy unchanged at midday today.  Even so there has been much discussion as to what the Bank could do today.  Having surprised the market a month ago with a step up in quantitative easing, there is a minority expecting a further increase this month.  This speculation relates to the fact that three members of the MPC, including Governor King, voted for a GBP75 bln increase in the amount of QE in August (a GBP 50 bln increase was agreed).  While it is very unlikely that the Bank will close the door to any further stimulus at this point there has likely been insufficient fresh economic data in the past month to warrant a change in view at this point.  Indeed, the market is coming around to the opinion that deliberations to QE are more likely in the month that coincides with the publication of the Bank's Quarterly Inflation Report.  Not only this but with GBP 35 bln in asset purchases still to be completely before the GBP 175 bln limit is achieved, the Bank still have time on their hands.  The other potential policy change that the Bank may carry out today is a change in the rate paid on banks' reserves with the BoE.  A reduction here would reduce the incentive for banks to hold money at the BoE and ideally increase the amount of funds made available to the real economy.  The Riksbank has already followed this path. The BoE has expressed concern that the benefits of low rates are not been fully passed on to the real economy.  However, the Bank recognised in the Aug MPC meeting that sterling Libor rates have fallen back to levels not seen since the start of 2008 †a trend that has continued in recent weeks.  With the fall in money market rates reflecting that the financial sector is healing, it is improbable that the Bank will take action today. That said, a reduction in the rates on banks' reserves appears more likely than a cut in the Bank rate.   Sterling is weakening vs the EUR this morning on nervousness that the BoE will take action suggesting risk for a pullback in the pound vs the EUR on a steady decision. 

As expected the RBNZ left interest rates unchanged at 2.5% overnight with Governor Bollard noting that sustainable economic recovery depends on both the export sector and a rise in housing savings; the current account deficit clearly a concern.  Both the NZD and the AUD have been subjected to profit-taking with a disappointing Australian labour market report (jobs fell by 27.1K in Aug), undermining talk of RBA rate hikes this year.   

This afternoon the BoC policy decision, US initial claims and trade data from both the US and Canada are due.