(Bloomberg) -- European government bonds rallied while the euro extended its biggest monthly loss since September amid growing speculation the European Central Bank will cut interest rates sooner rather than later.

ECB official Francois Villeroy de Galhau signaled over the weekend that policy makers could lower borrowing costs at any moment this year and all options are open at upcoming meetings. The market responded by firming wagers on a quarter-point decrease as early as April, which is now fully priced. Just before last week’s monetary policy meeting, the odds of that were 60%.

The bond market “wants to rally,” said Mohit Kumar, chief economist for Europe at Jefferies International. “It’s basically thinking that the ECB will anyway cut by June, but the risk is that the data could be weak and then the ECB is forced to cut early.” 

Bonds gained, led by the belly of the curve, with five-year German yields falling as much as nine basis points, double the drop in US Treasuries. The euro trailed most major peers as investors accounted for the decidedly more dovish outlook, extending its drop this month to 1.9%. 

The repricing extends a move that kicked off after the ECB’s decision last week. Then, President Christine Lagarde’s muted affirmation that policy makers may start lowering interest rates from around mid-2024 was taken by markets as a sign that earlier moves are very much in play.

“We think the stage is set for the ECB to cut in April,” BNP Paribas SA strategists including Sam Lynton-Brown wrote in a note. From a market perspective, the risks are tilted toward an earlier cut in March or a larger 50 basis points initial move, they added.

Other ECB speakers delivered cautious messages Monday. Peter Kazimir noted that incoming data and the ECB’s economic projection in March will guide their decisions, while Klaas Knot said policy makers must have certainty on wages in order to be able to lower rates.

But markets were intent to look past the warnings too. Traders priced in around 148 basis points of cuts this year, from about 130 basis points prior to the decision.

“The ECB’s message is confusing in the sense that data dependence cannot be maintained with a calendar guidance — Lagarde’s summer cut,” said Axel Botte, head of market strategy at Ostrum Asset Management. Still, the lack of unanimity within the Council “leaves the door open for early cuts,” Botte added.

(Updates with additional comment in paragraph three.)

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