Euro zone bond yields edge down as ECB euro strength concerns linger

(Updates with afternoon trading levels)

By Sophie Kiderlin

LONDON, Jan 29 (Reuters) - Euro zone bond yields edged lower in afternoon trading on Thursday as concerns persisted over the strength of the euro and whether it might prompt the European Central Bank to ease monetary policy sooner than many currently expect. Germany's 10-year ?yield was last down 2.5 basis points on the day at 2.824%. Shorter-dated euro zone yields fell for ?a fourth straight day, leaving the German two-year at its lowest level in a ?week. On Thursday, it was down 2 bps at 2.06%. The ?euro, which briefly ?spiked above $1.20 for the first time since mid-2021 this week, was down 0.2% on the day at $1.1932.

As ?the euro zone is a net energy ?importer, even modest currency gains can reduce the cost of energy and other imports, potentially lowering inflation. ECB policymaker Martin Kochertold the Financial Times ?on Wednesday that further euro appreciation could ?force the ?central bank to cut rates. With ECB officials sounding a note of concern about the impact of the currency on the outlook for inflation, bets on ?an ECB rate cut by the middle of the year have increased.

However, markets would need a clean break above the $1.20 level before getting excited about pricing in another rate cut, said Andrzej Szczepaniak, senior European economist at Nomura.

He added that rising oil prices were offsetting the euro's strength.

"The stronger euro-dollar and also the rise ?in ?oil prices actually offset each other. Obviously, stronger euro-dollar having a disinflationary impact, whereas higher oil prices having an inflationary impact."

"I think the ECB can very ?much stay on hold from that perspective, so long as you have a scenario whereby you sort of maintain these sorts of levels," he said. The oil price has risen by 16% this month to its highest since July, driven higher by a mix of a weaker dollar and geopolitical tensions. Elsewhere, the Federal Reserve left U.S. interest rates unchanged on Wednesday, as ?expected, saying inflation remained elevated and the labour market continued to stabilise.

Fed Chair Jerome Powell struck a slightly hawkish tone at his post-meeting press conference, but said a rate hike was not part of policymakers' ?baseline outlook. (Reporting by Sophie Kiderlin; Editing by Mark Potter, Amanda Cooper and Emelia Sithole-Matarise)