Euro zone bonds yields steadied as investors awaited more U.S. economic data after mild readings of U.S. inflation this week cleared the way for the Federal Reserve to cut interest rates next month.

Germany's 10-year bond yield, the benchmark for the euro zone, firmed 1.4 basis points (bps) to 2.191% after falling in recent days. Bond yields move inversely with prices.

Euro zone yields have fallen sharply from multi-month highs in May as weaker-than-expected U.S. payrolls data earlier this month and signs of easing inflation in the United States and Europe opened the door for policy easing this year.

Investors will keep a close on U.S. weekly jobless claims and retail sales data at 1230 GMT (8:30 a.m. ET) for more hints on the U.S. economy's health and monetary outlook. Tame U.S. inflation data in recent days has reinforced bets of rate cuts from the U.S. central bank.

"Overall, the narrative of disinflationary environment is very much relevant but the market should be very cautious not to extrapolate the process," said Michel Vernier, head of fixed income strategy at Barclays Private Bank.

"While we've seen fairly encouraging inflation data on the core side, it has not shown a big disinflationary trend. We may see a bit of a consolidation in the rate market in the coming weeks."

Money markets show traders are expecting an overall 103 bps of rate cuts from the Fed this year, with the odds of a 25 bp rate cut in September at 65%.

Traders meanwhile have fully priced in a 25 bp rate cut by the European Central Bank next month, after a quarter-point rate cut in June to 3.75%.

Volatility has gripped U.S. and European bond markets in recent weeks as concerns about a slowing U.S. economy and an unravelling of this year's most popular trades drove investors into safe-haven bonds and out of risky equities.

"After the moves that we've seen (in early August) and without evidence of the euro zone going into a recession, we see euro rate levels a little bit rich at this point," added Vernier.

Germany's two-year yield, which is more sensitive to changes in interest rate expectations, was up 1.2 bps at 2.36%.

Italy's 10-year yield added 0.6 bps at 3.57%, with the closely watched spread between Italian and German 10-year yields narrowing 1.1 bps at 137.2 bps.

(Reporting by Samuel Indyk in London and Sruthi Shankar in Bengaluru; Editing by Ros Russell and Ana Nicolaci da Costa)