The European Central Bank and Bank of England appeared set on Thursday to keep interest rates unchanged, prompting equity investors to extend their five-month rally but keeping currency and bond markets edgy.

The dollar was steady against the euro and Britain's pound.

Both central banks will announce their latest monetary policy decision later in the day.

While there was little tension in the markets over an actual rate change, investors are keen to see if they will sound more optimistic about the economic outlook and whether they will add more stimulus or not.

Events are playing out nicely for the ECB, with the first signs of a recovery, in combination with low inflation, justifying its current monetary stance, Capital Economics said in a note.

However, there are still several dangers looming, implying there is little time for self-indulgence.

Such dangers were evident in the U.S. economy on Wednesday when services sector and private payrolls disappointed.

Stock markets were generally looking past both the data and the central bank meetings at company earnings. The MSCI all-country world index was up 0.6 percent for a nearly 11 percent gain over July and August so far.

Europe's FTSEurofirst 300 <.FTEU3> gained more than 1 percent, driven higher by positive earnings reports. Belgian banking and insurance group KBC returned to net profit in the second quarter and Commerzbank beat analyst expectations thanks to lower writedowns for problem assets.

The European benchmark index is up more than 45 percent from its lifetime low of March 9.

The 200-day moving averages are turning up, a signal that it's a bull market, said Bernard McAlinden, investment strategist at NCB Stockbrokers, in Dublin. But ... in the near term, there is vulnerability to some kind of correction, as it looks stretched. Japan's Nikkei <.N225> closed up 1.3 percent.

WAITING FOR THE BANKS

The euro and sterling were steady against the dollar, hovering close to recent multi-month highs as the central bank announcements approached.

The euro was flat at $1.4405 as was the pound at $1.6988.

In particular focus was whether the Bank of England would extend its quantitative easing program, essentially the buying of debt with newly-created cash to pump money into the economy, or freeze it to give time for the 125 billion pounds injection to work through.

Bund futures fell to their lowest level in a week. The 10-year Bund yielded 3.382 percent, up about 7 basis points.

(Editing by Mike Peacock)

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