July 17 (Reuters) - Euro area government bond yields

edged higher on Thursday as investors remained uneasy over the

potential dismissal of Federal Reserve Chair Jerome Powell.

U.S. President Donald Trump said Wednesday he is not

planning to fire Powell, but kept the door open to the

possibility and renewed his criticism of the central bank chief

for not lowering interest rates.

Analysts said that if Powell were ousted under Trump's

pressure, short-dated yields could fall on expectations of

looser monetary policy. In contrast, long-dated yields would

rise as a less independent Fed would be seen as less credible in

fighting inflation.

Powell's current term is set to end in May 2026.

Germany's 10-year government bond yield, the

euro area's benchmark, rose one basis point (bp) to 2.70%.

The 2-year yield - more sensitive to expectations for policy

rates - rose 1.5 bps after falling 4 bps the day before.

Markets await U.S. data later in the session.

U.S. Treasury two-year yields tumbled on

Wednesday but came off their lows after Trump denied the report

about Powell, ending down 7.5 bps. They were last up 2 bps to

3.90%.

"A deepening in interest rate cut expectations would filter

directly into the front end of the curve," said Padhraic Garvey,

regional head of research, Americas, regarding the impact of

Powell leaving before his term.

The long-end of the curve "will be questioning the risks

being added to inflation," he argued, recalling long-dated U.S.

bonds also have "elevated fiscal deficit and upside to consumer

price pressures coming from tariffs to worry about."

Bottom line, investors should expect a much steeper curve,

which happens when the gap between long-dated and short-dated

yields widens.

French 10-year yields were up 1 bp at 3.40%.

The gap between French and German yields -- a

market gauge of the risk premium investors demand to hold French

debt -- at 70 bps.

Investors are focusing on the French budget approval

process, after Prime Minister Francois Bayrou proposed a 43.8

billion euro squeeze on Tuesday, which left-wing and far-right

politicians immediately criticised.

Any risk of a no-confidence motion would likely intensify

once a detailed budget bill is presented to parliament in

October, potentially prompting a widening of the yield spread.

"Maintaining this deficit target could add to political risk

premium for coming months with 10-year OAT-Bund spread

potentially reaching 80-85bp," said Aman Bansal, director

European rate strategy at Citi.

"This would likely reverse only if the government succeeds

in getting the budget approved, in which case the OAT-Bund

spread could decline to 60 bps as the 5.3% consensus for the

deficit is surprised to the downside," he added.

Italy's 10-year government bond yields rose one

bp at 3.59%, with the spread between BTPs and Bund yields at

88.50 bps. It hit 84.20 bps earlier this month, its lowest level

since March 2015.