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Euro zone bond yields unfazed by mixed PMIs, weigh ECB's stance

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* Euro zone periphery govt bond yields http://tmsnrt.rs/2ii2Bqr

By Yoruk Bahceli

July 23 (Reuters) - Euro zone bond yields sought direction on Friday and were little moved by mixed business activity readings from the region's largest economies, while investors continued to digest Thursday's ECB policy decision.

Flash Purchasing Managers' Index (PMI) data from IHS Markit, seen as a good gauge of economic health, is expected to show a combined reading of the bloc's services and manufacturing service growth accelerated further in July.

Data from France showed business activity growth slowing more than expected in July on the back of materials shortages and transportation delays, while Germany saw both manufacturing and services sector activity grow faster than expected. The data had little impact on the bond market, and the euro zone wide data is due at 0800 GMT.

Most euro zone 10-year bond yields were up around a basis point in early trade, with Germany's 10-year yield, the benchmark for the region, at -0.41%, near the lowest since February touched earlier this week.

Italy was the exception, with 10-year bond yields down 1 bp to 0.64%. The closely watched gap with German peers was at 104 bps, below yesterday's peak at 108 bps.

"The focus will be once more on price gauges but the ECB has taken some pressure off the market with its dovish turn, and by repeating its view that inflation will prove transitory," ING analysts told clients.

The European Central Bank on Thursday pledged to keep interest rates at record lows for even longer to boost the bloc's sluggish price growth, at its first meeting since it adopted a symmetrical, 2% inflation target as a result of its strategy review earlier in July.

A significant group of European Central Bank policymakers objected to the new interest rate guidance but most were won over and only two -- the German and Belgian central bank chiefs -- held out, sources told Reuters.

Mizuho analysts said that the ECB's new approach carries a much lower risk of the ECB making an error and tightening policy at the wrong time. "Euro rates volatility should be lower as a result," they told clients.

On Friday, ECB policymaker and French central bank chief Francois Villeroy de Galhau said he sees euro zone inflation hitting the 2% target at the mid-point of the ECB's forecast horizon in 12-18 months time.

ECB President Christine Lagarde said on Thursday that the bank would not hike interest rates until it sees inflation reach the target at the mid-point of its projection horizon. (Reporting by Yoruk Bahceli; Editing by Kim Coghill)