LONDON  - Euro zone government bonds yields slipped in early trading on Friday, stabilising after a sharp sell-off in the previous session, while investors waited for regional GDP and inflation data.

Investors are closely watching economic data for any signs that the economic recovery from the COVID-19 is gathering sufficient pace for major central banks worldwide to start scaling back the extraordinary stimulus that has been flowing into the economy since the start of the crisis.

Key benchmark yields hit multi-month highs on Thursday after U.S. economic growth and German inflation data came in higher than expected, strengthening the case for a pullback in central bank stimulus.

Germany’s 10-year Bund yield rose to its highest since March 2020 on Thursday and held near those levels in early trading on Friday, on track for its biggest weekly rise in two months.

At 0655 GMT, it was down half a basis point at -0.198%, having reached as high as -0.177% in the previous session .

Investors were focused on euro zone preliminary inflation data for April and an early euro zone gross domestic product reading for the first three months of 2021, both due at 0900 GMT (1000 London time).

Ahead of the euro-wide number, data from France showed its economy grew more than expected in the first quarter.

“The direction of EUR interest rates is no longer in doubt,” wrote ING strategists in a note to clients, citing a jump in European economic confidence indicators and inflation surveys, as well as an accelerating pace of vaccination in Europe.

Although the euro zone Q1 GDP data is slightly dated, covering the period before European economies got a boost from vaccines, the inflation data is more timely and could contain an upside surprise, ING said.

“While we have reservations about the sustainability of faster inflation in the Eurozone, it would come at a time EUR rates are rushing to price the recovery, and so would add to upside risk in our view.”

Italy’s 10-year yield was down 2 bps at 0.86%, compared to its 7-month high of 0.895% in the previous session.

A key market gauge of euro zone inflation expectations over the long term - the five-year, five-year break-even forward - was at 1.5479%, close to a two-week high.

“We think this is only the start of the move back towards the re-opening narrative,” wrote RBC Capital Markets strategists in a note to clients, noting that they have added a 10-year U.S. Treasury and 10-year Gilt short position to their portfolio. (Reporting by Elizabeth Howcroft; Editing by Pravin Char)

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