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Fed Chair Powell due to speak at Jackson Hole on Friday

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Money markets price in quarter-point Fed rate cut

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Anticipate ECB will hold rates steady

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Spread between French and Italian 10-year yield narrows

(Updates with afternoon trading)

By Joice Alves

LONDON, Aug 20 (Reuters) - Euro zone government bond

yields dropped on Wednesday, moving away from this week's

multi-month high, as traders positioned ahead of a gathering of

global central bankers later in the week.

Germany's 10-year bond yield, the euro zone

benchmark, was down 4 basis points at 2.71%, after hitting a

4-1/2 month high of 2.787% on Monday.

Longer-dated yields have been moving higher in Europe, and

around the world, but the selloff paused for breath on

Wednesday, as the euro zone saw some spillover from a more than

6 bps fall in Britain's 10-year yield after UK inflation data

that, while high, was insufficient to push already elevated

British yields higher.

Germany's two-year yield fell 3 bps to 2.71%.

Investors were also preparing ahead of the annual symposium

of global central bankers in Jackson Hole, Wyoming, and after

talks in Washington on ending Russia's war in Ukraine.

The focus of the event will be on what Federal Reserve Chair

Jerome Powell will say on Friday about the near-term outlook for

rates.

"We have (seen) this very large move higher in yields, and I

think everyone is sort of now waiting and looking for what

Powell will say in Jackson Hole," said Evelyne Gomez-Liechti,

multi-asset strategist, at Mizuho International.

She expected Powell to continue to stress the wait-and-see

mode as jobless claims in the U.S. were stable and unemployment

has risen only moderately, while service inflation has picked

up.

"I do think that Powell will sound a bit more patient and a

bit more hawkish versus what other Fed members have been

talking," she said.

The importance of the U.S. economy means changes in Fed rate

expectations often influence other bond markets.

Money markets are almost fully pricing in a quarter-point

rate cut at the Fed's September 16-17 meeting. The Fed policy

rate has been in the 4.25%-4.50% range since December.

In the meantime, futures point to the European Central Bank

holding interest rates at 2% at its September meeting.

FRANCE'S POLITICAL STORY

The spread between Italy's 10-year bond yield and its French

equivalent was also in focus. It has narrowed to levels last

seen two decades ago as France faces political instability and

heads to discuss its budget. The spread was last at around 13.5

bps.

"For me, France is a political story," Gomez-Liechti said.

"Prime Minister [François] Bayrou is very ambitious in his wish

to consolidate, fiscally speaking. But I think his ideas are not

going to go down very well with either the left or the right. So

I think there is risk of some sort of no confidence motion

coming through."

France's 10-year yield was down 3 bps at 3.41%,

having hit a four-month high of 3.468% on Monday.

Markets were largely unmoved by Germany's mixed response to

its auction of a total of 1.896 billion euros ($2.21 billion) in

30-year bonds.

Italy's 10-year bond yield was 3 bps lower at

3.55%, keeping the spread between Italian and German 10-year

yields at 83 bps.