Dollar strength continues.

The U.S. dollar extended gains Monday, as government bond yields edged higher, after a reading of the Federal Reserve's preferred inflation gauge cemented interest rate prospects ahead of its two-day meeting in Washington.

U.S. consumer prices, according to the the personal consumption expenditures (PCE) index, jumped to an annual rate of 2% last month, the Commerce Department said, the biggest gain in more than a year and bang-in-line with the Fed's 2% inflation target. The so-called core PCE index, which strips out volatile food and energy costs, accelerated to 1.9% from 1.6% in the previous month. 

The US has a number of inflation measures. Most are aware of CPI, but the personal consumer expenditure deflator is broader and is preferred by the Federal Reserve. Headline PCE deflator is up strongly today @ 2% and core 1.9%, helping to pave way for 3 more rate hikes this year.

— James Knightley (@Knightleyeco) April 30, 2018

The U.S. dollar index, which tracks the greenback against a basket of six global currencies, was marked 0.36% higher on the session at 91.86 following the release, which benchmark 2-year Treasury note yields, which are more sensitive to changes in interest rate perceptions, gained 2 basis points to 2.488% while 10-year note yields, which are more likely to move on growth projections, eased to 2.96%.

The dollar was also notably stronger against the euro, which drifted 0.35% lower at 1.2086 after data from Germany showed that inflation in Europe's largest economy slowed to 1.4% in April, down from 1.5% in March and well below the European Central Bank's 'just below 2%' consumer price target.

The greenback also gained 0.24% against the pound, which continues to slip following a much softer-than-expected reading of first quarter GDP, which slowed to 0.1% from 0.3% in the first quarter, that has clipped expectations for a near-term interest rate hike from the Bank of England. 

The Fed starts its two-day policy meeting Tuesday in Washington, but investors aren't expecting any changes in the key Fed Funds rate, which currently sits at 1.75%, until the bank's June meeting. By then, investors are pricing in a 93.8% chance of a 25 basis point rate hike, according to the CME Group's FedWatch tool, but that figure has slipped from a previous reading of 95.9% just over a week ago.

The crucial reading for Fed hikes, however, likely rests with the market's expectation of a December rate hike - which would take the 2018 total to four. At present, investors are pricing in a 39.9% chance of a December hike, down from 41.1% at the start of last week.