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Fed widely expected to cut rates

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German 10-year bond yields down

(Updates to Europe morning, adds quotes)

By Jaspreet Kalra

Sept 17 (Reuters) - Euro zone government bond yields

edged lower on Wednesday ahead of a widely-expected U.S. Federal

Reserve rate cut later in the day, with focus on any cues over

the extent of easing the Fed may deliver this year.

Germany's 10-year bond yield, the benchmark for

euro zone debt, was down 2 basis points at 2.68%. French and

Italian bonds traded in line with their German counterparts

, echoing muted moves in U.S. Treasury

yields.

U.S. 10-year Treasury yields fell 1.5 bps to

4.01%, while rate-sensitive 2-year yields hovered at

around 3.50%.

On the longer end of the curve, U.S. and German 30-year bond

yields slipped by about 2 bps each to

around 4.62% and 3.26%, respectively.

Germany's 30-year Bund auction also sailed through on

Wednesday with an improved bid-to-cover ratio compared to the

last auction, signalling strong appetite for the debt following

recent pressure on long-dated bonds.

POWELL COMMENTARY AND ECONOMIC PROJECTIONS

Traders fully price in a 25 basis-point cut by the Fed and

equally important will be commentary from Fed Chair Jerome

Powell and policymakers' updated economic and interest rate

projections.

Analysts reckon that a rate decision along expected lines

could spur an uptick in Treasury yields and the dollar in a

"buy-the-rumor, sell-the-fact" reaction in markets.

"There is a lot already in the price," said Kenneth

Broux, head of corporate research for FX and rates at Societe

Generale, pointing to the recent

weakness

in the dollar and decline in Treasury yields.

The dollar has fallen nearly 1% this month against other

major currencies.

A dovish surprise from the Fed, meanwhile, could prompt U.S.

Treasuries to outperform their German counterparts as investors

have pared expectations of policy easing from the European

Central Bank.

Money markets expect the Fed to lower policy rates by nearly

70 bps by the end of 2026 but price in an about 50% chance of a

25 bps rate cut by the ECB by the middle of next year.

Data released on Wednesday showed that month-on-month

consumer inflation in the Euro zone stood at 0.3% in August, in

line with expectations.

The spotlight will also be on whether Fed policymakers

considered an outsized 50 bps cut at a time when President

Donald Trump has pressured them to cut rates further, casting a

shadow over central bank independence.

Elsewhere, Wednesday's data showed British inflation held at

3.8% in August, remaining the highest of any major advanced

economy.

Although the Bank of England is expected to keep rates

unchanged on Thursday, Norway's central bank, which meets the

same day, is expected to lower rates by 25 bps.

"The latest data doesn't dramatically move the needle one

way or another on the prospect of a further rate cut (by the

BoE) later this year," ING analysts said in a note.

Britain's 10-year gilt yield was last down 2 bps at

4.62%.