* Bond yields dip, steading after Tuesday’s sharp rise
* Euro zone flash CPI for Feb due out
* Euro zone periphery government bond yields tmsnrt.rs/2ii2Bqr
By Fanny Potkin
LONDON, Feb 28 (Reuters) - Euro zone bond yields edged down in early trade on Wednesday, as investors awaited inflation data which could provide the next clues on just how quickly the European Central Bank could remove monetary stimulus and move towards raising rates.
Bond markets in Europe and the United States took a knock on Tuesday after U.S. Federal Reserve Chairman Jerome Powell said data since December pointed to a strengthening economy and his confidence had increased that inflation would rise.
Having risen sharply the previous session, bond yields in Europe headed back down as the focus turned to inflation data.
Economists polled by Reuters forecast that euro zone inflation rose 1.2 percent in February from a year earlier, compared with 1.3 percent in January, comfortably below the European Central Bank’s target of just below 2 percent.
Weak inflation numbers from Germany on Tuesday suggest the euro zone number could also come in weaker than expected, bringing further relief to euro zone bond markets which have in recent weeks braced for a change in the ECB’s ultra-easy monetary policy stance.
“The inflation data could disappoint as the German data indicated and that could be bullish for bonds, but we also have this spill over from the U.S. bond selloff,” said ING rates strategist Benjamin Shroeder.
Bundesbank President Jens Weidmann said on Tuesday that the ECB could end bond purchases this year while an interest rate hike in 2019 was not unrealistic if the euro zone’s economic upswing continued.
Germany’s 10-year government bond yield, the benchmark for the euro zone, was down around a basis point at 0.67 percent and not far from one-month lows hit on Monday.
It was set for its first monthly fall since October, down 2.5 basis points. In contrast, U.S. 10-year Treasury yields are set to end February with a rise of around 18 bps - reflecting investor expectations for higher rates.
“The negative Fed talk has had little impact on bonds or euro area peripherals,” analysts at Societe Generale said in a note.
“So any surprises in the German and Italian votes this weekend could be amplified by the lack of much adjustment so far.”
Italy holds a national election this Sunday - the same day that Germany finds out the results of a ballot of Social Democrat party members on a coalition deal with Chancellor Angela Merkel’s conservatives.
Germany auctions 3 billions euros of its 10-year Bund later in the day. The U.S. publishes its GDP numbers for its fourth quarter.
Reporting by Fanny Potkin; graphic by Dhara Ranasinghe; Editing by Jon Boyle