MUMBAI, July 8 (Reuters) - The Indian rupee and bonds are likely to trade with a positive bias this week after U.S. economic data affirmed hopes of Federal Reserve rate cuts this year, although local and U.S. inflation data will also guide the domestic currency and bonds.

The rupee ended at 83.4850 against the U.S. dollar on Friday, down 0.1% for the week, in contrast to the gains in most Asian currencies amid a decline in U.S. bond yields and the greenback.

The odds of a potential U.S. rate cut in September got a boost on Friday after data showed the U.S. unemployment rate rose to 4.1% and annual wages increased at the slowest pace in three years.

The dollar weakened on Friday and ended the week lower by 0.9%, its sharpest weekly fall since early May.

"We look for three cuts this year versus the two cuts currently priced by markets with the Fed funds down at 4% by next summer," ING Bank said in a note.

Both India and the U.S. will report consumer inflation data this week, with the latter closely watched for its effect on the currency. Core U.S. CPI likely held steady at 0.2% month-on-month in June, a Reuters poll showed.

The dollar-rupee pair may drift lower early in the week but until it "falls and closes below the established buying zone near 83.35, mostly sideways price action should continue", a foreign exchange trader at state-run bank said.

Investors will also pay attention to Federal Reserve Chair Jerome Powell's semi-annual monetary policy testimony to U.S. lawmakers on Tuesday and Wednesday.

Meanwhile, the 10-year Indian government bond yield ended at 6.9926% on Friday, having eased 2 basis points (bps) for the week after a 4 basis point rise in the prior week.

The 10-year U.S. yield eased 7 bps last week to 4.27%.

Traders expect the Indian benchmark yield to move in the 6.95%-7.04% range this week.

The directionless move in yields for most of last week was due to foreign investors' underwhelming response to the inclusion of India's debt in JPMorgan's emerging market debt index.

Foreigners bought bonds worth only around 52.5 billion rupees ($629 million) in the first few days after the inclusion, well below market expectations of 150-170 billion rupees.

Still, overall inflows in the index bonds have touched $11 billion since September, when the inclusion was announced. Recent flows have been in longer-duration securities and the market expects purchases to pick up in the coming weeks.

"There was pre-emptive buying ahead of the bond inclusion by foreign investors," said Sandeep Yadav, fixed income head at DSP Mutual Fund.

"Going forward, the foreign flows will again be sparsed across the month and one should not expect lumpy month end-purchases."

KEY EVENTS:

** U.S. June CPI and core CPI: July 11, Thursday (6:00 p.m. IST) (Reuters poll: 0.2% on-month)

** U.S. initial weekly jobless claims week to July 1: July 11, Thursday (6:00 p.m. IST)

** India May industrial production: July 12, Friday (5:30 p.m. IST)

** India June CPI: July 12, Friday (5:30 p.m. IST)

** U.S. June PPI machine manufacturing: July 12, Friday (6:00 p.m. IST)

** U.S. July U Mich sentiment prelim: July 12, Friday (7:30 p.m. IST) ($1 = 83.5000 Indian rupees) (Reporting by Jaspreet Kalra and Dharamraj Dhutia; Editing by Savio D'Souza and Mrigank Dhaniwala)