(Updates prices at 1555 GMT)

By Stefano Rebaudo

Nov 3 (Reuters) - Euro area yields were set for their biggest weekly fall in five months after data on Friday showed U.S. employers added fewer jobs than expected last month, reinforcing expectations central banks, especially the Fed, have finished their rate hike cycles.

The data came at the end of a week in which both the Federal Reserve and the Bank of England left rates unchanged and euro zone headline inflation fell to a two-year low, causing money markets to fully price in 50 basis points of European Central Bank rate cuts by July next year.

Germany's 10-year government bond yield was down 6 basis points (bps) at 2.65% and set to end the week down 18 bps, its biggest fall since the week that ended June 2.

The benchmark for the euro zone has fallen for seven straight sessions, and is at its lowest since mid-September.

U.S. Treasuries have led the way in bond markets recently, and the benchmark 10-year yields hit an over five week low of 4.484% and was last a little above that, down 11 basis points on the day.

The U.S. figures showed employers added 150,000 jobs in October, below the 180,000 expected by economists.

"From a policy perspective this gives confidence the Fed remains on hold for the foreseeable future and only really hikes again if growth or inflation accelerate from here," said Matt Palazzolo, senior investment strategist at Bernstein Private Wealth Management.

"This, given the evidence both in this report and in recent reports - the ISM manufacturing (activity data released Wednesday) for example, is becoming less likely."

The ECB last week kept rates steady and hinted at a steady policy ahead, though it pushed back on expectations for rate cuts any time soon, and ECB board member Isabel Schnabel said on Thursday that the bank cannot yet close the door on further rate hikes.

Market pricing however now anticipates the ECB's next move to be a rate cut. July 2024 ECB euro short-term rate (ESTR) forwards were at 3.38%, implying market expectations for a deposit facility rate at 3.48% from the current 4%. July forwards at 3.4% imply expectations for 50 bps of rate cuts.

ITALY OUTPERFORMS

Italy's 10-year yield, the benchmark for the euro area's periphery, dropped 9 bps to 4.46% and was on track to end the week down 35 bps, its biggest fall since the last week of May.

Such a move drove the gap between Italian and German 10-year yields – a gauge of the risk premium investors ask to hold debt of the euro zone's most indebted countries – to its tightest since end-September at 180.3 bps.

Strong bond demand led by investors keen on locking in the highest yields in over a decade, along with the ECB's focus on avoiding an excessive widening of spreads, are expected to keep yield gaps between core and peripheral bonds in check.

The ECB confirmed last Thursday that it would continue reinvestments from the Pandemic Emergency Purchase Programme (PEPP) until the end of 2024. Still, ECB President Christine Lagarde said the council had yet to discuss the issue.

The ECB can use reinvestments from the PEPP to support bonds of southern Europe's most indebted countries. Lagarde called it the first line of defence against fragmentation – an excess widening of yield spreads among the euro area's bonds, which might hamper monetary policy transmission.

(Reporting by Stefano Rebaudo, additional reporting by Alun John; Editing by Gareth Jones, Alexander Smith and Mark Heinrich) ;))