Euro zone bond yields fell across the board on Friday as signs of cooling inflation in the bloc cemented expectations of an interest rate cut by the European Central Bank next month.

Data showed inflation in the 20 countries sharing the euro slowed to 2.2% from 2.6%, in line with expectations, as lower energy costs pushed it closer to the ECB's 2% target after three years of above-target price growth.

The German 10-year bond yield, the benchmark for euro zone borrowing costs, slipped 3.0 basis points to 2.253%, while the interest rate sensitive two-year bond yield dipped 1.4 bps to 2.351%.

"Today's data is fully consistent with the need for another rate cut in September," said Chris Scicluna, head of economic research at Daiwa Capital Markets.

"But we are maintaining a view for just two more rate cuts this year - at the September meeting and December - and that's because the Governing Council still has a relatively hawkish bias. It is still concerned about services inflation being too high."

Traders were pricing in a 98% chance that the ECB will cut rates by 25 bps next month, while the odds of another such move in October stood at 58%. Traders overall saw rate cuts of 64 bps from the ECB the end of the year.

Separate data sets showed German inflation fell more than expected in August, while French numbers came in slightly above forecasts and Italy's was in-line.

Euro zone inflation is falling as predicted, easing the risk that further rate cuts would derail disinflation, ECB board member Isabel Schnabel said, cautioning that risks to the outlook still remain.

Another set showed the number of people out of work in Germany rose significantly less than expected in August. Still, the seasonally adjusted job rate remained stable at 6.0%.

Investors are now awaiting the release of U.S. personal consumption expenditures price index, the Federal Reserve's preferred inflation gauge, at 1230 GMT (8:30 a.m. ET).

The moves in European bond markets this month have largely been dictated by shifting U.S. rate expectations, particularly after a much weaker-than-expected payrolls data early in August fuelled bets of bigger rate cuts by the Fed.

While recent data has eased fears of an imminent U.S. recession, investors will be laser focussed on incoming data to gauge how far and fast the U.S. central bank will cut rates.

Italy's 10-year yield was lower by 3.5 basis points​ (bps) at 3.633%, and the gap between Italian and German bunds was at 137.4 bps.

Investors will also be watching Sunday's election in two states in eastern Germany - Thuringia and Saxony - where anti-establishment parties are performing strongly in opinion polls.

(Reporting by Sruthi Shankar in Bengaluru; Editing by Helen Popper and Toby Chopra)