Euro zone yields steady as investors await direction from Fed decision

By Amanda Cooper

LONDON, July 30 (Reuters) - Euro zone government bond yields held steady on Wednesday, heading for their first weekly decline in a month, as investors took stock of the European Union's U.S. trade deal and a hefty decline in the euro this week.

The Federal Reserve will deliver its decision on U.S. monetary policy after the European market close, leaving investors unwilling to push euro zone bonds too far in either direction.

With much of the uncertainty over tariffs now removed following the EU deal with the United States for a 15% levy on imported goods, bond yields have been drifting lower this week.

Elsewhere, China and the United States agreed to seek an extension of their tariff truce after two days of talks aimed at defusing an escalating trade war between the world's two largest economies.

German 10-year yields DE10YT=RR, which serve as the benchmark for the wider euro zone, were down less than 1 basis point at 2.681%, and down 3.5 bps so far this week. That would mark the first weekly decline since late June.

Data on Wednesday on euro zone economic growth showed the single currency bloc proved more resilient than expected in the second quarter, growing by 0.1%, against forecasts for no growth, which suggested businesses are adapting to the uncertainty around trade.

"Despite uncertainty prevailing in the first half of the year, combined growth in the first two quarters has not disappointed," said Bert Colijn, ING chief economist, Netherlands.

"For the short term, don’t expect miracles, but at the same time, there are new signs of life starting to emerge for the euro zone economy."

Separate releases this week have shown French and Spanish second-quarter growth has been better than expected, while that in Italy shrank unexpectedly in that period.

Meanwhile, the euro EUR=EBS has come under intense pressure this week, as relief over the EU-U.S. trade deal has given way to concern about the longer-term economic impact on the regional economy. The currency is heading for a 1.5% weekly drop, its largest since last November.

German two-year yields DE2YT=RR held at 1.92%, set for a 2-bp decline this week.

Since the ECB's last meeting, traders have been whittling away at their bets on another rate cut this year, pushing two-year yields to 1.964% last week, their highest since April.

Money markets now show the chances of another cut this year have dropped to around 30%, with March seen as the most likely next meeting at which the central bank lowers borrowing costs again.

The Fed, which has been under constant pressure from U.S. President Donald Trump to cut rates in spite of the data offering no justification yet to do so, is not expected to lower borrowing costs.