(Updates throughout, adds comment)

By Stefano Rebaudo and Joice Alves

May 10 (Reuters) - Euro zone government bond yields

edged higher on Friday with investors turning their focus to

U.S. inflation data due next week which could affect the Federal

Reserve's policy path.

Last week, a softer-than-expected U.S. employment report for

April re-ignited bets that the Fed would make two 25 basis point

interest rate cuts this year.

Traders want to see further progress on inflation easing

towards the Fed's 2% target to solidify those rate cut

expectations.

Markets are pricing in a divergence between the European

Central Bank and the Fed easing cycle in 2024, seeing 70 bps of

rate cuts from the ECB in 2024, and 45 bps

from the Fed.

The outcome of the Bank of England's (BoE) policy meeting

and U.S. data on Thursday failed to affect market expectations

about the central banks' easing cycle.

Germany's 10-year government bond yields, the

bloc's benchmark, rose to a one week high, last up 2.4 basis

points (bps) to 2.52%. Germany's 2-year yield, more

sensitive to policy rate expectations, rose 3.5 bps to 2.97%,

touching a one-week high.

"Risk appetite is rising again across markets with

remarkable consistency, from equities to bonds, credit, and

commodities," said Florian Ielpo, head of macro at Lombard Odier

Asset Management.

"The key to the continuation of this parallel progression

ties to the U.S. inflation report next week: lower core

inflation would mean a continuation of that trend; a higher

print would shake markets".

The Fed last week signaled it is still leaning towards

eventual reductions in borrowing costs, but noted that recent

disappointing inflation readings could make those rate cuts a

while in coming.

Italy's 10-year yield rose 2 bps to 3.85%, and

the yield gap between Italian and German bonds - a

gauge of the risk premium investors seek to hold bonds of the

euro area's most indebted countries - stood at 133 bps.

Orders for Italy's new 6-year BTP Valore retail bond have

risen above 11 billion euros, Bourse data showed on Friday,

while he previous BTP Valore edition attracted bids worth 18.3

billion euros.

Demand from retail investors has supported Italian

government bond prices for months, with investors wondering if

it's now waning.

"The retail bonds issued by the Tesoro also offer

hold-to-maturity bonuses and strong tax incentives which could

potentially negate some of this pricing difference (with bank

deposits)," said Rohan Khanna, head of euro rates strategy at

Barclays, adding the yield-seeking approach of Italian

households is unlikely to change.