LONDON, May 30 (Reuters) - Sterling inched higher on Thursday after falling sharply the previous day as a jump in U.S. bond yields boosted the dollar.
The pound was up 0.1% at $1.2709 on Thursday, after falling 0.5% on Wednesday to trade as low as $1.2681 overnight.
Britain's currency was pulled down from a more-than-one-month high reached on Tuesday by a rally in the dollar. The U.S. currency has benefited from rising Treasury yields, driven by strong economic data, tough talk from Federal Reserve policymakers, and a run of weak bond auctions.
Global markets have been grappling with strong U.S. economic data, most recently an improvement in consumer sentiment, which has cast doubt on when developed market central banks can lower interest rates.
The strong U.S. figures, along with better-than-expected UK growth and inflation data in recent weeks, have caused traders to reduce their bets on Bank of England rate cuts this year to 27 basis points, implying just one reduction in 2024.
The expectations for higher-for-longer interest rates have supported the pound, helping it reach its highest level since 2022 against the euro on Wednesday.
It held steady against the single currency on Thursday, with one euro trading hands for 85.06 pence.
"We think the market has gone too far with this pricing," said Chris Turner, head of global markets at ING. "We're going for an August rate cut, we're pretty confident about that."
Turner added: "Our view would be that sterling doesn't hold its recent gains and it's been a bit of an overreaction."
There are few signs so far that the UK election campaign is having an impact on the markets, with analysts saying inflation and central bank interest rate policy are the main drivers.
The U.S. dollar index was last down 0.17% on Thursday at 104.96 after rising to a two-week high overnight.
(Reporting by Harry Robertson; Editing by Sriraj Kalluvila)
