LONDON, June 30 — The pound edged higher today and was on track for a monthly gain of about 1.5 per cent, boosted by a sharp rise in British bond yields across the month.

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.

Sterling was last up 0.12 per cent at US$1.263 (RM5.90), and was set for a monthly gain of 1.49 per cent.

The euro fell 0.3 per cent against the pound, meanwhile. It was set for a very small monthly decline, after sliding almost 2 per cent versus the pound in May.

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.

“Probably it’s the usual driver in terms of UK yields are moving higher again today, more so than elsewhere,” Hardman said.

Yields on both the 10-year and two-year UK government bonds were up about 6 basis points today, to 4.44 per cent and 5.29 per cent respectively.

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 per cent last week but traders who bet on the future path of borrowing costs think they’re likely to rise to around 6.2 per cent by early next year. Economists recently polled by Reuters think a 5.5 per cent peak is more likely.

Sterling is up 4.4 per cent 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.

“For now, I think markets are generally viewing high yields as more of a positive for the pound,” said Hardman. “That would only really flip around if the economy started to show more weakness in responding to rising yields.”

Hardman said sterling could rise to US$1.30 before becoming bogged down by economic concerns.

The US dollar index — which tracks the currency against six major peers — was up 0.13 per cent today to 103.45.

The key data point for markets is US personal consumer expenditure inflation, the Federal Reserve’s preferred measure of price rises, due out at 1230 GMT. — Reuters