Aug 26 (Reuters) -

Euro area government bond yields edged up on Monday after

European Central Bank officials sounded cautious on future

monetary easing, with investors on hold ahead of key economic

data later this week.

The bloc's borrowing costs slipped on Friday after

Federal Reserve Chair Jerome Powell said the U.S. central bank

would

support

a strong labour market, strengthening expectations for a

super-sized 50 basis points (bps) rate cut next month.

Investors are awaiting euro zone inflation figures on

Friday after the release of data from Italy and France. Germany

and Spain will publish their data on Thursday.

German

business morale

fell to 86.6 in August, with analysts polled by Reuters

expecting 86.0.

Germany's 10-year bond yield, the benchmark

for the euro zone bloc, rose 0.5 basis points to 2.23%, after

dropping 2 bps on Friday.

Traders have been fully pricing 25 bps from the Fed in

September for weeks and increased bets on 50 bps to 39% from 24%

after Powell remarks.

Analysts said the scope for a major repricing in bond yields

is limited before the August employment report, due on September

6, as Powell's speech at Jackson Hole shifted the focus from

upside inflation risks to downside labour market risks.

"Employment reports will be of particular importance in

shaping the policy trajectory," said David Doyle, head of

economics at Macquarie, which forecasts successive cuts of 25

bps in September, November, and December meetings.

ECB CAUTION

Meanwhile, ECB chief economist Philip Lane struck a more

cautious note than the Fed, saying the central bank is making

"good progress" in cutting inflation back to its 2% target but

could still need a restrictive monetary policy.

Analysts also flagged that governing council member Robert

Holzmann, seen as a hawk, warned that the ECB might not lower

rates next month.

Market participants label as hawks central bank officials

who advocate a tight monetary policy to control inflation, while

doves focus more on economic growth and the labour market.

Markets have barely moved bets on ECB rate cuts since

Friday, pricing between 65 and 70 bps in 2024.

Traders are also keeping an eye on a fresh spike in tensions

in the Middle East after Iran-backed Hezbollah launched hundreds

of rockets and drones at Israel in one of the biggest clashes in

more than ten months of border warfare.

A report from Citi underscored that if the Middle East

conflict were to broaden and impair global oil supply, it would

act as a negative supply shock for the global economy, lowering

growth, boosting inflation, and creating new headaches for

central banks.

However, other issues concerning investors include tensions

between the U.S. and China, shifts in global supply chains, and

the rising prominence of populist voices.

Italy's 10-year yield, the benchmark for the

euro area periphery, was up 1.5 bps at 3.58%, and the gap

between Italian and German bunds stood at 134 bps.