(Bloomberg) -- Investors betting on an early start to the European Central Bank’s interest-rate cutting cycle risk getting derailed by Christine Lagarde this week.

Strategists and investors say European bonds have more room for losses than gains from Thursday, when the ECB delivers its final policy decision of the year. That’s because of the recent strong rally that has already sent benchmark German yields to the lowest levels since April at around 2.2%.

Any dovish tone from President Lagarde would simply validate current market bets on as much as six quarter-point cuts throughout 2024, and allow bonds to hold recent gains. But a surprisingly hawkish tone could send German yields back above 2.4%, according to TwentyFour Asset Management.

“The risk is for bunds and other European government bonds to sell off,” said Elliot Hentov, head of macro policy research at State Street. “There’s no way we’re going to get an ECB readout that is going to exceed market expectations. Frankly, the odds are that it will underwhelm.”

German bond yields have fallen more than 40 basis points over the past month as investors dramatically ramped up bets on ECB cuts next year after data showed inflation and economic activity were softer than expected.

The repricing was turbocharged last week after ECB member Isabel Schnabel, a renowned hawk, said the drop in inflation was “remarkable,” a comment that was seen by markets as a sign that cuts could come sooner than expected.

Markets currently fully price five quarter-point rate cuts next year, with a sixth one hanging in the balance. Just a month ago, bets were on just three cuts. There’s now also a 70% chance of the first one happening in March, a scenario that was barely contemplated by markets not long ago.

That’s a fairly extreme outlook, given ECB policymakers have shown no rush to act. For hawks such as Bundesbank President Joachim Nagel, the danger remains that inflation returns with a vengeance and he has repeatedly ruled out saying that rates have reached a peak.

“It’ll be easy for Lagarde to come off as more hawkish versus the market,” said Orla Garvey, a senior fixed-income portfolio manager at Federated Hermes. “I’ll be looking at whether or how she adapts her ‘higher-for-longer’ mantra.”

The stronger-than-expected US jobs report on Friday served as a reminder of how yields and rate bets are sensitive to economic data and policymaker speeches. As traders scaled back bets on Federal Reserve and ECB cuts, yields on US and German benchmark bonds jumped at least 10 basis points.

Gordon Shannon, a portfolio manager at TwentyFour Asset Management, said a hawkish tone from Lagarde would likely lead markets to erase the probability of a cut in March.

“The way that they could be a little bit more hawkish would be to indicate they will need to see continued evidence of slowing inflation beyond March,” he said. “That would make it mathematically impossible for a cut by then.”

--With assistance from Alice Atkins.

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