(Updates with morning trading, adds quote)

By Alun John

LONDON, June 18 (Reuters) - Euro zone bond yields held

steady on Wednesday with traders awaiting the outcome of the

Federal Reserve meeting later in the day for any hints about

further rate cuts, and keeping a wary eye on developments in the

Middle East.

Germany's 10-year bond yield was down 1 basis

point on the day at 2.52%, and its two-year yield was flat at

1.86%.

Both were largely in the middle of their recent ranges.

The big event for markets around the world on Wednesday

is the Fed's rate decision, though the U.S. central bank is

widely expected to leave its benchmark overnight interest rate

in the 4.25%-4.50% range, where it has been since December.

Traders' focus will be on whether it gives any clues as to

whether and when it might begin cutting rates again, though it

is also likely to repeat that it can't give much guidance until

the impact of U.S. President Donald Trump's import tariffs and

fiscal policies become clearer.

Even an unlikely change in Fed messaging may do little to

nudge European government bonds out of their recent rangebound

trading, ING analysts said, as the economic effect of tariffs -

inflationary in the U.S., disinflationary in Europe - means Fed

and ECB policy is becoming more divergent.

Markets are currently pricing one final 25 basis point

ECB rate cut this cycle to take its terminal rate to 1.75%,

expectations that have been fairly steady in recent weeks,

contributing to rangebound trading in government bonds.

Michiel Tukker, senior rates strategist at ING, said

there are two things that could change that.

"First is trade. July 9 is the date where we possibly

have trade tariffs kick in if there isn't a trade deal. That'll

start becoming a hot topic in the weeks before, and that's the

period we're rolling into," he said.

"Either negotiations turn sour, we go back to 1.5%

(terminal rate), or things go quite well and he (Trump) softens

his narrative and we maybe go closer to 2%, or at least stay

near 1.75%, and the focus will shift back to German fiscal

spending."

Germany is embarking on a massive ramp up of borrowing

to fund increased spending on infrastructure and defence, likely

leading to higher yields in the long term.

The other factor in the near term, Tukker said, was

economic data, though it would require multiple data points to

detect a clear trend given the recent volatile trade policy -

"each data point can tell a different story depending on the

sample month."

Investors will also be looking at Wednesday's releases

of U.S. Treasury International Capital data that show overseas

ownership of Treasuries.

There was much speculation earlier this month that

foreign investors were looking to reduce their ownership of U.S.

government bonds due to erratic U.S. policy. Again, however, one

data point will not be enough to provide a clear picture.

Other bonds in Europe were largely moving in line with

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

euro zone periphery was flat at 3.51%.