Euro zone yields set for third daily rise, bets wane on ECB cuts

LONDON, July 25 (Reuters) - Euro zone government bonds headed for a third daily rise on Friday, as investors lost some conviction in the European Central Bank cutting interest rates much further, while growing chances of a U.S. trade deal drew cash out of safe haven assets.

The ECB left interest rates at 2% on Thursday, as expected, and President Christine Lagarde suggested policymakers were less concerned about an abrupt slowdown in growth and inflation over the coming year.

Bond yields rose sharply in response.

Two-year German Schatz yields, which rose by nearly 12 basis points on Thursday in their biggest one-day increase since mid-May, were up 2.3 bps at 1.934%.

Benchmark 10-year German yields were up 3.3 bps to 2.726%, while Italian yields rose nearly 5 bps to 3.613%, leaving the gap between the two at 88.4 bps, its highest in a week.

Money markets show traders are undecided about another ECB rate cut this year, attaching about a 30% chance of a drop below 2% by the end of December. (Reporting by Amanda Cooper. Editing by Mark Potter)