Sept 16 (Reuters) - Euro zone government bond yields

edged up on Tuesday as investors stayed on the sidelines ahead

of a Federal Reserve policy meeting, which could shape

expectations for U.S. rates.

Investors will also closely watch Thursday's policy

decisions from the Bank of England and the Bank of Japan.

The U.S. Federal Open Market Committee will announce its

decision on rates on Wednesday.

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

the euro zone bloc, rose 1.5 basis points to 2.71%.

German investor morale rose unexpectedly in September, the

ZEW economic research institute said on Tuesday.

Markets expect the Fed to deliver a 25-basis-point rate cut,

but market reaction is likely to hinge on the central bank's

communication, the updated "dot plot" rate projections, and any

comments from Chair Jerome Powell on the conditions for further

easing.

"Statement language changes could tilt in a dovish

direction, reflecting the recent deterioration in the labour

market data," said David Doyle, head of economics at Macquarie.

"Chair Powell is likely to echo his tone from Jackson Hole

during his press conference and emphasize that a shift in the

balance of risks warrants an adjustment to the policy rate."

Markets are fully pricing in a 25-basis-point rate cut by

the Fed this week, and expect 145 bps of easing by end-2026. The

current federal funds target range is 4.25% to 4.50%.

U.S. Treasuries were little changed in London trade, with

the 10-year yield flat at 4.03%.

Investors await U.S. retail sales data later in the session.

Markets are pricing in a 40% chance of a 25-basis-point rate

cut by the European Central Bank by June 2026

, which would bring the key rate to 1.75%.

The deposit rate is seen at 1.95% by December 2026.

Germany's 2-year yields, more sensitive to

expectations for ECB policy rates, were up 1 bp at 2.02%.

Italian sovereign bonds were little changed after

outperforming their peers the day before.

Italy's 10-year yields were up 1 bp at 3.52%

after dropping 4 bps on Monday.

The yield gap between safe-haven Bunds and 10-year French

government bonds - a market gauge of the risk

premium investors demand to hold French debt - was at 79 bps.

Fitch downgraded France's sovereign credit to A+ on Friday.

Analysts flagged that French OATs were already trading

markedly cheaper than double-A or single-A rated peers.

The spread rose above 80 basis points on Monday, up from

around 65 bps a month ago, as a politically vulnerable French

government headed into last week's confidence vote.