Euro area yields back off highs as US inflation ups chances of Fed cut

(Updates throughout; refreshes prices at 1618 GMT)

By Stefano Rebaudo

Nov 13 (Reuters) - Euro zone yields retreated from the day's highs on Wednesday after data showed U.S. inflation increased as expected in October, which prompted traders to ramp up their bets on a Federal Reserve rate cut next month.

The U.S. consumer price index rose 0.2% for the fourth straight month, the Labor Department's Bureau of Labor Statistics said on Wednesday. In the 12 months through October, the CPI advanced 2.6% after climbing 2.4% in September.

Markets were pricing in a roughly 80% chance of a 25 basis points (bps) Fed cut in December, from 60% before data, according to CME's FedWatch tool.

The outlook for European Central Bank monetary policy moved less after the data, with traders discounting the deposit rate reaching 1.95% by next July, from around 1.96% earlier .

Analysts recalled Minneapolis Fed's Neel Kashkari - seen as one of the more hawkish voices -- suggested on Tuesday a reasonably high bar for the Fed to pause in cutting rates, saying there'd have to be a surprise on the inflation front.

Germany's 2-year government bond yield, which is more sensitive to expectations for ECB rates, was last up 1.3 basis points at 2.142%, having traded earlier at a session high of 2.191%.

Investors recently balanced rising U.S. rates on the so-called Trump trade against a weak European economic outlook, which supports expectations for future ECB rate cuts.

The benchmark German 10-year yield was up 3.4 bps at 2.385%, down from an earlier session high of 2.401%.

"Europe is facing a structural problem (higher energy costs, lower productivity) mixed in with weak cyclical data that should see the market price in lower inflation, a lower terminal rate for the ECB and a lower euro with it," Jordan Rochester, who is head of FICC strategy for EMEA at Mizuho in London, said.

Separately, the leader of Germany's conservative Christian Democrats (CDU) Friedrich Merz, in pole position to become Germany's next chancellor, said on Wednesday he could be open to reforming the debt brake, which limits the public deficit to 0.35% of gross domestic product, in certain circumstances. (Reporting by Stefano Rebaudo and Amanda Cooper, editing by Ros Russell)