LONDON, July 18 (Reuters) - German 10-year bond yields held steady around their lowest in three weeks on Thursday as traders waited to see whether the day's European Central Bank meeting will throw up any surprises that will cause them to reassess the monetary policy outlook.
The 10-year Bund yield, the benchmark for the euro zone bloc, was little changed at 2.42%. It hit a three week low of 2.408% on Wednesday.
The ECB is all but certain to keep interest rates unchanged while signaling that its next move is still set to be a cut, even if this guidance is likely to be vague and carry caveats.
The central bank lowered rates from record highs last month in a move some policymakers considered rushed and the bank is likely to be more cautious about a follow-up step, given stubbornly high domestic inflation and wage growth.
Market pricing currently reflects expectations of around 45 basis points of further rate cuts from the ECB this year, with another 25-bp move more likely than not by September's meeting - October's is fully priced - and a reasonable chance of another by December.
It will announce its policy decision at 1215 GMT, followed by President Christine Lagarde's 1245 GMT news conference.
"Our baseline remains an ECB that reiterates a data-dependent approach, which means no forward guidance for a September cut," said ING analysts in a note
"Euro rates could see a nudge higher in this case as markets seem to be looking for an ECB that is moving closer towards an easing cycle."
Italy's 10-year yield was little changed at 3.71%, just off three-month lows and the gap between Italian and German Bunds was steady at 129 bps, having narrowed meaningfully since nudging above 160 bps in June on the back of political uncertainty in Europe driven by the French election.
Germany's two-year bond yield, which is more sensitive to ECB rate expectations, was little changed at 2.77%. (Reporting by Alun John; Editing by Emelia Sithole-Matarise)
