FX round-up: Pound catches bids on policy statement, US inflation highest since February

In the UK, interest rates were kept unchanged at 0.25% and the asset purchase facility was unanimously voted to stay at £435bn.

The hawkish tone of the monetary policy statement helped sterling trade 1.04% higher against the greenback to 1.3345.

Inflation is still a niggling issue for the Bank of England, with an extract from the statement stating, "The sterling exchange rate has been volatile and the price of oil has increased. Headline and core CPI inflation in August were slightly higher than anticipated. Twelve-month CPI inflation rose to 2.9% and is now expected to rise to above 3% in October." but also admitted that, "All MPC members continue to judge that, if the economy follows a path broadly consistent with the August Inflation Report central projection, then monetary policy could need to be tightened by a somewhat greater extent over the forecast period than current market expectations."

Many market participants took this as a sign that, provided the economy continues in broadly the same direction, a rate hike could be on the cards for later this year.

"Things could get more interesting for sterling moving forward, with more volatility expected as the currency becomes increasingly sensitive to monetary policy speculation," said Lukman Otunuga at FXTM in London.

Citi analysts said, "If these events pass without significant effect on economic confidence, if inflation exceeds 3 percent in October and if the labour market continues to tighten, a 25 basis-point Bank Rate hike could become a reality for November."

Sterling surged by 1.35% against the euro to 1.1267 by 1610 BST on the back of the positive tone of the MPC.

The single currency took a slight beating against the dollar as US month on month inflation beat expectations to come in at 0.4% and unemployment claims dropped to 284,000, 14,000 less than last week.

EUR/USD was fairly flat on the day, down only 0.03% to 1.1882, but hit a low on the day of 1.1839.

"The inflation number, while probably not high enough to set off any inflation alarm bells just yet, should still be sufficient keep alive hopes for a third rate hike in December by the Fed," said Omer Esiner, at Commonwealth Foreign Exchange in Washington, adding, "On balance, I would call the data positive even though we have seen a limited sustained reaction by the dollar."

The dollar index traded slightly lower on the day by 0.16% to 92.371.

The sabre rattling has continued in the Pacific region with the latest comments out of Pyongyang stating that the US should be "beaten to death like a rabid dog" and regarding Japan, said, "The four islands of the [Japanese] archipelago should be sunken into the sea by the nuclear bomb of Juche,” adding, "Japan is no longer needed to exist near us."

This latest round of words had no effect on safe haven currency the Japanese yen, with USD/JPY trading 0.18% higher to 110.69, after hitting a day high of 111.03.

Traders put the lack of reaction down to negative Chinese data that showed a reduction of industrial production to 6%, a drop in fixed asset investment to 7.8% and a slow down in retail sales year on year to 10.1%.

The Swiss franc, another safe haven currency, also took no notice from the latest geopolitical risks, with USD/CHF also up on the day to 0.9665, but has been stuck in a tight 0.9644/75 range for the entire European trading session.

The Swiss National Bank held 3 month LIBOR rates steady on Thursday at -0.75% and said in a policy statement, "Since the last monetary policy assessment, the Swiss franc has weakened against the euro and appreciated against the dollar," and that, "Overall, this development is helping to reduce, to some extent, the significant overvaluation of the currency. The Swiss franc nevertheless remains highly valued, and the situation on the foreign exchange market is still fragile."

With regards to inflation and GDP they said that forecasts had "risen marginally to 0.4%, from 0.3% in the previous quarter." And that, " Owing to weak GDP momentum in late 2016/early 2017, the current year is likely to see growth of just under 1.0%."

"The SNB seems content to lag well behind the ECB and Fed in the monetary cycle," said Marc Chandler, global head of currency strategy at Brown Brothers Harriman in New York.

The Canadian dollar wekend further against it's US counterpart on Thursday as USD/CAD traded 0.3% up to 1.2210, after spiking to a day high of 1.2241 after the release of positive US inflation.

Losses for the currency came as a slew of disappointing data from China suggested the world's second-largest economy is finally starting to lose some momentum as borrowing costs rise.