SYDNEY: The Australian dollar edged higher on Wednesday as data showed the domestic economy rebounded by more than expected in the second quarter, adding to upward pressure on bond yields.

The 0.6% rise in gross domestic product topped forecasts of 0.5%, and took annual growth to its fastest in almost two years at 1.8%. Most of the gain came from household consumption as lower borrowing costs and past tax cuts fattened incomes.

"It paints a firmer picture of the consumer as a continued improvement in real incomes combined with a holiday-related boost to discretionary services spend," said Pat Bustamante, an economist at Westpac.

"A key uncertainty is the extent to which this will continue and our card tracker index shows a slowdown since mid-year, suggesting some of the lift in momentum may have faded."

The upside surprise on growth was enough to shift the dial somewhat on expectations for further rate cuts from the Reserve Bank of Australia.

Markets are still almost fully priced for a quarter-point reduction to 3.35% in November, but the ultimate extent of easing dropped to 44 basis points from 50 basis points.

Bonds have already been under pressure and three-year futures slipped 5 ticks to a seven-week low at 96.480.

The Aussie firmed a fraction to $0.6522, having dipped 0.5% overnight to as deep as $0.6482. Support comes in around $0.6462, with resistance at Monday's top of $0.6560.

The kiwi dollar was pinned at $0.5859, after falling almost 0.7% overnight to as far as $0.5839. It has more support at $0.6819 and resistance at $0.5914. Much of the volatility overnight was caused by a sharp fall in sterling as concerns about the British government's finances sent gilt yields to highs not seen since 1998.

The pound even shed 0.6% on the Aussie to stand at A$2.0509 , near its lowest in a month.

The selloff in gilts added to the lift from the GDP numbers and pushed Australian 10-year bond yields up 6 basis points to a five-week top of 4.430%.

Thirty-year yields hit their highest since late May at 5.179%, though there is very little of this debt on issue and trading is illiquid.

Australia's government debt to GDP ratio is among the lowest in the developed world at 35% and its bonds carry the top triple A credit rating, offering support against global fiscal worries. - Reuters