Euro zone yields at more than two-week high after US data, ahead of ECB decision

(Updates with afternoon trading)

By Harry Robertson and Alun John

LONDON, June 10 (Reuters) - Euro zone bond yields edged up on Wednesday as traders processed developments in the Middle East war and an expected uptick in U.S. consumer prices, and looked to a European Central Bank meeting that is expected to deliver an interest rate hike. Germany's 10-year bond yield, the benchmark for the euro zone, rose to about a two-and-a-half-week high of 3.06%. The 2-year yield, sensitive to ECB rate expectations, climbed 2 bps to 2.70%. Both had been higher earlier on Wednesday but dipped marginally after data showed the U.S. Consumer Price Index increased at its fastest pace in three years in May, boosted by surging prices for energy products. However, the so-called core CPI, which removes volatile food and energy components, gained 0.2% on a monthly basis, just below expectations. Bond markets around the world are focused on higher oil prices and inflation and what central banks will do in response. Nick Rees, head of macro research at Monex Europe, said the U.S. CPI core print took the sting out of the headline figure, which increased 4.2% compared to a year earlier. For the Federal Reserve, "this is close to a best-case print under the circumstances. Having seen markets close to fully pricing at least one hike this year, this soft core reading buys (Fed) Chair (Kevin) Warsh some breathing room," Rees said.

ECB MEETING With markets all but certain the ECB will raise rates by 25 basis points on Thursday, the focus will be on whether the central bank or its president, Christine Lagarde, provide signals on how they see policy evolving. Money markets on Wednesday were pricing in around 68 bps of ECB tightening this year, implying two 25-bp rate hikes and roughly a 70% chance of a third. Lagarde may not be able to give many details, however, due to uncertainty about the Middle East war, when the Strait of Hormuz will reopen, and the direction of energy prices. Stalled U.S.-Iranian peace talks have kept global oil prices above the $90 per barrel mark, underpinning yields. Benchmark Brent was last at around $93 a barrel, up around 1.4%. U.S. President Donald Trump said on Wednesday that Iran had taken too long to negotiate a deal and would now "have to pay the price", while Tehran said it would reassess diplomatic engagement with Washington after overnight tit-for-tat strikes. (Reporting by Harry Robertson. Editing by Mark Potter, Tomasz Janowski and Paul Simao)