Higher Germany inflation raises pressure on European Central Bank to tighten monetary policy

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- Narrowing bond yield spreads may lend support to EURUSD.

Ten-year bund yields rose as much as four basis points, or 0.04 percentage point, to 0.5 percent as data showed January consumer prices rose by more than 2 percent in the Saxony, Hesse and North Rhine Westphalia regions of Germany, surpassing the ECB's target of below but close to 2 percent for the euro area.

Yields on lower-rated euro zone government bonds rose sharply on Monday after data showing inflation in Germany hit a 3 1/2-year high stoked talk of an unwinding of monetary stimulus, though German yields fell as investors sought safety.

Consumer prices in Germany, Europe's biggest economy, rose at an annual 1.9% pace this month, Destatis said, up from 1.7% in December and the fastest rate since July 2013. Data from up to 16 German states is used to calculate preliminary inflation figures.

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"That combined with stock market weakness pushed German yields back down".

Next-door neighbour Belgium also announced rapid price increases, with inflation at 2.65 per cent. Portuguese yields hit their highest level in about a year PT10YT=TWEB. Economists had forecast 2 percent inflation. The central bank now buys EUR80 billion of euro-zone bonds a month in an effort to stoke growth and inflation across the region. In October 2016, German 10-year bond yields jumped from -0.14% to +0.20% after talk that the European Central Bank was considering cutting back bond purchases.

While President Draghi is expected to leave monetary policies unchanged in 2017, he can talk euro-zone bond yields higher by merely mentioning a potential "tapering" of asset purchases in the future.

Elsewhere, Greece's two-year bond yield soared to a one-month high at around 10 percent GR2YT=TWEB on worries about whether the International Monetary Fund will participate in a bailout program for the indebted southern European country.