Money markets priced 79 basis points of monetary easing from the ECB this year, compared to 86 basis points at Tuesday’s close. The chance of a first quarter-point move in June fell to about 80% after being fully priced last week. 

The moves, which followed data showing underlying US inflation exceeded economist forecasts for a third straight month, raised the stakes for the upcoming ECB policy decision. Euro-area officials are expected to hold rates steady but signal readiness to start easing in coming months.

“This week’s meeting could well prove an important milestone in setting expectations,” said Jan Felix Gloeckner, senior investment specialist at Insight Investment. “As the ECB is preparing the ground for a June rate cut, markets will be looking for any hints on the pace of cuts and the potential landing zone.”

ECB officials seem to have all but agreed that June is the month to start dialing back policy restriction. The subsequent pace of easing is less clear, with Lagarde insisting it’ll be strictly guided by economic performance — and others already busy plotting their preferred course.

Yet, hawkish policy in the US could make it difficult for policymakers in the euro area to deliver multiple cuts. A significant divergence in interest rates could weigh heavily on the euro, potentially sending it back toward parity with the dollar. The common currency fell as much as 1% after the US data, the most since July last year. 

“For me what’s really at stake tomorrow and in the face of today’s US inflation data is whether the ECB will make clear that it will cut rates before the Fed,” said Andrea Tueni, head of sales trading at Saxo Banque France. “It would be quite a surprise if Lagarde pushes back against a rate cut in June tomorrow.”

Traders also pared bets on Fed rate cuts after the US data, abandoning wagers on more than two quarter-point moves this year and sending Treasuries slumping. European bonds also took a hit, with two-year German bonds — among the most sensitive to higher borrowing costs in the region — leading declines and sending the yield up seven basis points to 2.96%.

“‘We prefer holding European sovereign bonds over US Treasuries for the same reason that the ECB is likely to start cutting before the Fed,” said Jason Davis, global rates portfolio manager at J.P. Morgan Asset Management. “European inflation is more clearly on a downward trend, European growth is far weaker and the labor market looser.”

With assistance from James Hirai and Julien Ponthus.

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