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UPDATE 2-German yields rise to highest since June, focus turns to euro zone inflation

* Euro zone periphery government bond yields tmsnrt.rs/2ii2Bqr (Updates prices, adds Germany seen revising 2020 GDP forecast)

AMSTERDAM, Aug 28 (Reuters) - German bond yields briefly rose to their highest since early June on Friday, after the U.S. Federal Reserve’s decision to target average inflation pushed yields to multi-month highs on both sides of the Atlantic.

Fed Chairman Jerome Powell said on Thursday the central bank would now try to keep inflation at an average 2% over time, offsetting below 2% periods with higher inflation “for some time”, and to ensure employment does not fall short of its maximum level.

Attention now turns to inflation readings in the euro zone after the Fed’s decision.

French inflation data released on Friday was in line with expectations in a Reuters poll, rising 0.2% in August, down from 0.9% in July.

German and euro zone inflation readings will follow next week.

Readings are expected to show euro zone inflation at just 0.2% in August, far below the European Central Bank’s target of close to but below 2%, leading some analysts to see the rise in market inflation expectations as unsustainable.

Long-term expectations are now near their highest since early February, before the coronavirus shook European markets, at over 1.25%.

“Today’s first indications for euro inflation during August from France should underscore the central banks’ challenges in reaching their inflation targets,” Commerzbank’s head of rates and credit research, Christoph Rieger, told clients.

“With this, euro break-evens at pre-crisis levels hold downside potential and we still see better value in buying Bund dips above -0.4% 10-year yields,” he said, referring to the measure of inflation expectations.

Germany’s 10-year yield briefly rose to its highest since early June at -0.372% in early trade. It was last unchanged in late afternoon trading at -0.41%, around 1 basis points higher than Thursday’s open, before Powell’s speech.

As a positive sign for the euro zone’s powerhouse, a government coalition told Reuters the German government was set to revise upward its economic growth forecast for this year to a decline of less than 6% from a previous estimate of -6.3%.

Italian bond yields were up 1 basis point to 1.10%. after rising to their highest in over a month at 1.124% ahead of an auction earlier.

The sovereign raised 8.25 billion euros ($9.82 billion) via the auction, including the sale of a new five-year bond. ($1 = 0.8398 euros)

Reporting by Yoruk Bahceli Additional reporting by Julien Ponthus Editing by Larry King, Susan Fenton and Frances Kerry

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