Euro area government bond yields edged up on Friday ahead of key U.S. economic data that could affect expectations for the interest rate outlook on both sides of the Atlantic.

German yields fell early this week after weak economic figures, but they bounced back after they dropped to around 2%. Investors became more cautious and shifted their focus to inflation risks due to geopolitical tensions in the Middle East.

Germany's two-year bond yield, which is more sensitive to European Central Bank rate expectations, was last up 2.5 basis points (bps) at 2.10%. It hit 1.987% on Tuesday, its lowest level since December 2022.

Markets are pricing in an around 95% chance of a 25 bps rate cut by the ECB in October from 80% last Friday.

Germany's 10-year bond yield, the benchmark for the euro zone bloc, was up one bp to 2.14%. It hit 2.011% on Tuesday, its lowest level since January.

The gap between French and German 10-year yields - a gauge of risk premium that investors demand to hold France’s government bonds - was last at 79 bps. It reached its widest since 2012 beyond 85 bps during France's elections this summer.

The French government plans to subject the budget to a 60 billion euro belt-tightening drive next year to hit new fiscal targets, officials said on Wednesday, outlining an unprecedented push to rein in France's spiralling deficit.

Italy's 10-year government bond yield rose 0.5 bps to 3.48%, with the gap between Italian and German yields at 133 bps.

(Reporting by Stefano Rebaudo; Editing by Mark Potter)