May 3, 2018 / 7:18 AM / a year ago

Euro zone bond yields inch up as flash CPI data looms

* Bond yields nudge higher, flash CPI in focus

* U.S. Fed ends May meeting with rates on hold

* Euro zone periphery govt bond yields

By Dhara Ranasinghe

LONDON, May 3 (Reuters) - Government bond yields in the euro area were just a touch higher on Thursday ahead of the closely-followed monthly “flash” inflation estimate for the single currency bloc in April.

A slowdown in the euro zone economy’s solid growth momentum and subdued inflation could test the European Central Bank’s resolve to roll back its hefty stimulus scheme.

While the ECB is seen on track to end stimulus by the end of the year, further disappointments in inflation or economic data could prompt investors to scale back rate-hike bets.

Economists polled by Reuters forecast inflation in the bloc rose 1.3 percent rise in April from a year earlier, unchanged from March. The ECB targets inflation at close to 2 percent.

The ECB’s favoured core inflation measure, which strips out volatile energy and unprocessed food prices, is forecast to rise 1.2 percent. A another core gauge that also excludes alcohol and tobacco and is closely tracked by many economists, is estimated at 0.9 percent.

In early trade, most 10-year bond yields in the region were 1 to 2 basis points higher on the day. Sentiment was supported by an overnight fall in U.S. bond yields after a quarterly refunding program came in short of expectations, while the U.S. Federal Reserve left policy unchanged at a meeting.

“We expect the euro zone CPI (consumer price index) to deliver another blow to the odds of ECB tightening,” said Antoine Bouvet, a rates strategist at Mizuho.

“While the headline number is likely to turn out weaker than consensus, in light of the individual member states’ releases, we think the most potent market mover would be another disappointment in core inflation.”

Consumer prices in Germany, Italy and Portugal grew less than expected in April, data showed on Monday.

Expectations the ECB will lift interest rates towards the middle of next year remain realistic, because worries about an end of the euro zone’s economic expansion are overblown, German central bank chief Jens Weidmann said on Wednesday.

Still, a market gauge of long-term inflation expectations in the euro zone has pulled back from 8-week highs hit last week to trade around 1.70 percent.

Money market pricing also suggests investors have tamed bets on rate hike around the middle of next year.

Eonia forward rates dated to the ECB’s meeting in June 2019 suggest roughly a 80 percent chance of a 10 basis point rate rise is priced in. Just over a week ago, more than a 90 percent chance of such a move was anticipated.

Reporting by Dhara Ranasinghe Editing by Keith Weir

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