By Alun John
LONDON, Nov 15 (Reuters) - Euro zone bond yields sat at their lowest in two months on Wednesday, a day after cooler-than-forecast U.S. inflation data reinforced expectations the Federal Reserve is finished with rate hikes, sending yields down on both sides of the Atlantic.
Further outside support for euro zone bonds came on Wednesday as data showed British inflation also cooled by more than expected in October.
Germany's 10 year yield dropped to 2.575%, its lowest since mid September, down around two basis points (bps) on the day, after dropping 11.6 bps on Tuesday.
That move echoed Tuesday's 19 bp drop in the 10 year U.S. Treasury yield after the softer-than-expected consumer inflation data, which led markets to bring forward their expectations for a first rate cut, possibly to around May.
"Clearly yesterday’s key market driver was the weaker than expected US CPI print," said analysts at Rabobank in a note.
"In essence the message from the slightly lower than expected inflation print is that the Fed will be able to run less tight monetary policy than was previously expected."
Market pricing for the European Central Bank is close to pricing in a rate cut as soon as April.
Away from inflation, there are several other things for bond investors to watch on Wednesday, including an expected ruling from Germany's constitutional court on the legality of a 2021 decision to re-allocate 60 billion euros ($64 billion) of unused debt from the pandemic era to its climate and transformation fund.
Also on the agenda is a German 30-year bond auction, and euro zone industrial production data.
Italian bonds outperformed, with Italy's 10 year yield dipping 4 bps to 4.373%, also its lowest in two months.
The gap between German and Italian 10 year yields was 178 bps, down from as much as 209 bps in mid October, when worries about Italy's budget gave markets some jitters.
Germany's two year yield was last at 2.985% and Italy's was down 4 bps at 3.63%, both their lowest since early September.
(Reporting by Alun John Editing by Mark Potter)