U.S. rate hike prospects prop up German yields at one-week high

By John Geddie

LONDON (Reuters) - Europe's benchmark German bond yield hit a one-week high on Wednesday ahead of U.S. inflation data that could further increase what is still seen as an outside chance of an interest rate rise in the world's largest economy next month.

Fed chair Janet Yellen said on Tuesday that despite considerable uncertainly over economic policy under U.S. President Donald Trump, the central bank is likely to raise interest rates at an upcoming meeting.

Most analysts still think that hike is likely to come in June, but traders see around an 18 percent chance of a hike in March, up 13 percent from before Yellen's statement, according to CME's FedWatch tool.

Yellen who said March remained a "live" meeting for a possible rate hike is due to give further testimony to Congress on Wednesday which will likely repeat that message.

Yet of more importance will be to see if economic data backs up the case for monetary tightening. January's inflation print due at 1330 GMT is the main event alongside retail sales data, with jobless claims later in the afternoon.

Economists polled by Reuters expect consumer prices to have risen at an annualised 2.4 percent in January, up from 2.1 percent previously.

"The key focus today remains on U.S. impetus," Commerzbank strategist Rainer Guntermann said.

"While the run of U.S. activity data is more likely to slightly disappoint market expectations, bouncing inflation could still add to Yellen's hawkish guidance."

DIVISIONS

Germany's 10-year bond yield - the euro zone benchmark - climbed 1 basis point to nudge past Tuesday's peak and hit a new one-week high of 0.381 percent.

U.S. equivalents were perched just below an 11-day high hit Tuesday.

Most other euro zone bonds were little changed, with Greek debt being the notable underperformer after Eurogroup head Jeroen Dijsselbloem ruled out a bailout deal by the next meeting of finance ministers on Feb. 20.

Greek two-year bond yields climbed some 50 bps to 9.74 percent, while 10-year yields were 14 bps higher at 7.82 percent.

Yellen's remarks on Tuesday were swiftly followed by Dallas Fed President Robert Kaplan urging that it would be "prudent" for the U.S. central bank to raise rates sooner than later.

But not all policymakers were so certain.

Atlanta Fed President Dennis Lockhart said the U.S. central bank does not need to rush to raise rates as it evaluates how the new Trump administration's policies may effect the economy.

Lockhart, who retires from his position at the end of the month, said he was "not dogmatic" about whether the economy will likely warrant two or three rate increases this year, but that in either case "I don't really see compelling reasons to move ahead in March."

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(Editing by Alison Williams)