Pound rises as bond yields climb and U.S. inflation slows

The dollar index - which tracks the currency against six major peers - was last down 0.19% at 103.13, reversing earlier gains. UK bond yields have jumped in June as data has shown that Britain's inflation problem is more deeply entrenched than elsewhere, pushing the Bank of England to hike interest rates by an outsized 50 basis points last week.

The pound rose on Friday, boosted by higher UK bond yields and a fall in the dollar on signs that U.S. inflation is decelerating. U.S. personal consumption expenditures (PCE) inflation - the Federal Reserve's preferred gauge of price pressures - slowed to 3.8% year-on-year in May, compared to 4.3% in April.

Meanwhile core PCE inflation, which strips out volatile food and energy prices, also cooled in May. Economists expected it to stay at 4.7%, but it slipped to 4.6%. Sterling was last up 0.55% at $1.268, and was set for a monthly gain of 1.9%.

The U.S. inflation data caused the dollar to fall slightly, helping the pound rise from the $1.266 level it stood at before the figures were released. The dollar index - which tracks the currency against six major peers - was last down 0.19% at 103.13, reversing earlier gains.

UK bond yields have jumped in June as data has shown that Britain's inflation problem is more deeply entrenched than elsewhere, pushing the Bank of England to hike interest rates by an outsized 50 basis points last week. Higher yields tend to boost a country's currency by making fixed income investments there look more attractive. That dynamic was in play again on Friday, said Lee Hardman, currency analyst at lender MUFG.

The euro was last down 0.34% against the pound, at 85.85 pence, compared to 85.86 pence before the U.S. data. It was set for a 0.1% monthly fall, after sliding almost 2% versus the pound in May. "Probably it's the usual driver in terms of UK yields are moving higher again today, more so than elsewhere," Hardman said.

Yields on the UK's two-year bond yield were up about 5 bps on Friday to 5.27%, while those on U.S. and German bonds were roughly flat. The two-year yield, which is particularly sensitive to interest rate expectations, has jumped by just under a percentage point in June. That's the biggest rise since the chaos unleashed by the UK's fiscal announcement in September.

The Bank of England raised interest rates to 5% last week but traders who bet on the future path of borrowing costs think they're likely to rise to around 6.2% by early next year. Economists recently polled by Reuters think a 5.5% peak is more likely.

Sterling is up 4.9% against the dollar this year, but plenty of analysts have started to question whether those gains can continue if high interest rates start to weigh on growth.