Euro zone bond yields steady as ECB euro strength concerns persist

By Sophie Kiderlin

LONDON, Jan 29 (Reuters) - Euro zone bond yields held steady on Thursday as concerns persisted over the strength of the euro and whether it might prompt the European Central Bank to cut interest rates, while the U.S. Federal Reserve kept rates unchanged.

Germany's 10-year yield was last little changed at 2.86%. DE10YT=RR

Yields on shorter-dated euro zone bonds retreated on Wednesday, with the German two-year yield slipping to its lowest level in a week. It was last steady at 2.07%. DE2YT=RR

The euro rose above the $1.20 mark on Tuesday, having strengthened in recent days against a weaker dollar.

Although it is now trading just below $1.20, the euro zone's status as a net energy importer means even small currency gains can push down the cost of energy and other imported goods, which in turn could lower inflation.

ECB policymaker Martin Kocher told the Financial Times that further euro appreciation could force the central bank to cut rates.

Market bets on an ECB rate cut by the middle of the year increased on Wednesday.

The euro's rise "tilts the balance of risks slightly further towards more European Central Bank cuts, but the rates impact should be limited for now," ING analysts said in a note.

Elsewhere, the Fed left 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.