UPDATE 1-Fed pause pushes euro zone bond yields higher

Higher-rated euro zone bond yields inched up on Thursday after a pause in trading for the May Day holiday, tracking a rise in U.S. Treasury yields after the Federal Reserve left rates unchanged and signalled little appetite to adjust them any time soon.

Fed Chair Jerome Powell shook off pressure from U.S. President Donald Trump to cut interest rates by one percent and was unwavering on the policy rate outlook, saying the recent relapse in inflation rates was likely temporary. Powell acknowledged a modest pick-up in growth in Q1, which marked a shift from previous statements, but analysts noted the reference was past tense, and took the comments to mean the Fed did not expect growth to necessarily continue.

"There's concern among the Fed that the positive impact of the tax cuts is beginning to wane, and growth may indeed prove softer going forward," said Matt Cairns, rates strategist at Rabobank. "The language is neither prompting an acceleration in terms of monetary policy, or a deceleration." The policy statement, and particularly Powell's insistence the Fed saw no compelling reason to consider a rate cut in response to weak inflation, prompted a modest selloff in stock markets and pushed bond yields higher.

But data from both sides of the Atlantic, which suggested that signs of growth in the first quarter will not be sustained, limited the rise in yields. Germany's benchmark 10-year government bond yield was 0.5 basis points higher at 0.02 percent, in line with moves of most other core 10-year bond yields in the bloc., ,

Data on Thursday showed euro zone factory activity contracted for the third month in a row in April, hurt by weak global demand, rising trade protectionism and concerns over Britain's upcoming departure from the European Union . German retail sales meanwhile fell by 0.2 percent on the month in March, due largely to sharp drops in sales of food, drink and tobacco.

Meanwhile, data on Wednesday showed U.S. manufacturing activity slowing to a 2-1/2-year low in April amid a sharp drop in new orders, while construction spending unexpectedly fell in March. Ten-year U.S. Treasury yields fell below 2.48 percent after the factory data fuelled fears of a slowdown.

In contrast, one bright spot was Greece, where manufacturing hit a 19-year high. Greek 10-year bond yields fell two basis points to 3.358 percent. In the UK, the Bank of England is expected to keep rates on hold with the focus of the market on the outcome of today's local elections. (Reporting by Virginia Furness Editing by Raissa Kasolowsky and Kirsten Donovan)