LONDON: Euro zone bond yields rose on Tuesday ahead of consumer price data set to firm expectations that the European Central Bank will revise its inflation forecasts upward this week for the first time in a year.
A rebound in oil prices to nearly $50 a barrel coupled with an above-consensus inflation reading in the bloc's largest economy Germany on Monday has cemented hopes that data due at 0900GMT will show recent price falls in the euro area bottomed out in May.
This will set the scene for the ECB to mark up its staff inflation forecasts at its policy meeting on Thursday for the first time since June 2015, allowing it to hold pat on any further monetary policy easing or interest rate cuts.
"It seems almost certain that euro zone May flash CPI due later today will come in above the consensus," ING strategist Martin van Vliet said.
Economists polled by Reuters expect euro zone inflation at an annualised minus 0.1 percent in May, up from minus 0.2 percent previously.
A number of banks, however, are calling for a higher reading after German annual inflation rose out of negative territory in May, beating a consensus of minus 0.1 percent.
German 10-year bond yields climbed 1 basis point to 0.19 percent on Tuesday, extending a near 3 bps rise on Monday, and heading back towards one-month highs of 0.205 percent hit last week.
Most other euro zone yields were 1-2 bps higher on the day.
While inflation in the euro zone remains far from the ECB's near 2 percent target, economists polled Reuters were unanimous in expecting the ECB to hold policy steady on Thursday, while a slim majority do not see the ECB easing again this year.
The ECB's staff forecasts for inflation, released every quarter, have not been revised upward since this time last year. In March, the 2016 outlook was slashed to 0.1 percent from 1 percent.
However, the March forecast was based on estimates for Brent crude averaging about $35 a barrel this year. Since then, the price of oil has risen more than 20 percent as fears of an oversupply glut have eased.
Market expectations for the bloc's long-term inflation prospects - as measured by the five-year, five-year forward rate - have also staged a tepid recovery climbing back near 1.50 percent.
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