GBP/USD edged higher to around 1.3240 during Friday's European trading session, on track for a second consecutive daily gain, as US Treasury yields retreated after a strong rally, lifting market sentiment.

The 10-year US Treasury yield fell 0.23% to around 5.22%. The yield has dropped more than 2.5% from the 20-year high of 5.36% reached earlier this week.

Lower US bond yields also weighed on the dollar, with the US Dollar Index currently trading slightly lower around 102.00.

The pullback in Treasury yields boosted risk appetite, pushing sterling to 1.3230.

GBP/USD rose 0.1% to around 1.3240 during Friday's European session, as US Treasury yields retreated after a strong rally, lifting market sentiment.

The 10-year Treasury yield fell 0.23% to around 5.22%. US Treasury yields have dropped more than 2.5% from the 20-year high of 5.36% set earlier this week.

This pullback indicates that selling pressure in the bond market has temporarily eased, giving risk assets some breathing room, with sterling benefiting as a risk-sensitive currency.

The Dollar Index briefly fell below 102, as the Treasury yield pullback weighed on the dollar.

Lower US bond yields also pressured the dollar. The Dollar Index briefly dropped below 102.00, having previously touched a yearly high of 102.54 but failing to break through, before subsequently retreating.

Treasury yields pulling back from the 20-year high of 5.36% to around 5.22% eroded the dollar's interest rate advantage support.

The weaker dollar provided upward momentum for GBP/USD, pushing the pair to around 1.3240.

Market Focus Shifts to Next Wednesday's US CPI Data, Inflation Expectations Impact Fed Path

Meanwhile, investors are turning their attention to Wednesday's release of the US September Consumer Price Index data. This inflation reading is expected to significantly influence Fed rate expectations, as multiple officials have indicated that high price pressures from energy shocks and AI infrastructure buildout are their key concerns.

The minutes from the Fed's September meeting released Wednesday showed: "Multiple officials warned that AI buildout could ultimately push aggregate demand beyond supply, creating additional upward pressure on prices." This statement indicates that the Fed's internal concerns about sticky inflation stem not only from energy but also from demand pressures stemming from AI investment.

If CPI data comes in stronger than expected, it could reinforce rate hike expectations, supporting the dollar and pressuring sterling; if the data is weaker than expected, it could further weaken the dollar and support sterling.

Risk Appetite and Yield Pullback Jointly Support Sterling, but CPI Is the Key Variable

GBP/USD is currently receiving dual support from risk appetite sentiment and the Treasury yield pullback. The 10-year Treasury yield falling back to 5.22% and the Dollar Index briefly dropping below 102 together provide upward momentum for sterling.

However, the sustainability of this support depends on next Wednesday's CPI data. If inflation data is strong, it could reignite bond selling pressure, push yields higher and support the dollar, potentially causing sterling to give back gains; if the data is moderate, yields could fall further and sterling could continue to rise.

Ahead of the CPI release, sterling may remain around 1.3240, with directional choice awaiting data triggers.

(GBP/USD daily chart, source: Easymarkets)

As of 15:12 Beijing time, GBP/USD was quoted at 1.3238/39.