(Bloomberg) -- Bonds surged after business activity across Europe encountered an unexpected setback, prompting traders to amp up wagers on monetary easing. 

The yield on Germany’s benchmark 10-year bonds fell six basis points, dragging the rate on US Treasuries lower, after manufacturing and services PMI readings for Europe’s two biggest economies fell short of expectations. Markets moved to price a higher chance of two additional rate cuts from the European Central Bank this year, after separate index for the whole of the euro-zone also dropped more than forecast in June.

With the easing cycle now underway in the euro area and a number of other major developed-market economies, investors are trying to assess how quickly those policymakers will cut again, and when other central banks — including the Federal Reserve — will join in.

“The global rate-cutting cycle is likely to gather momentum in the second half,” said Mark Haefele, chief investment officer for global wealth management at UBS Group AG. “We expect bond yields to fall as the market shifts focus from the timing of the first Fed rate cut to considering how far rates might fall.”

Traders now see a second ECB cut by October and an 80% chance of a third this year, up from about 65% on Thursday.

Rate-cut bets also gained traction in the UK, where private sector companies reported slower growth than expected. Money markets are now fully pricing two quarter-point cuts this year from the Bank of England, which on Thursday hinted it was nearing a first move. Gilts jumped, with the yield on policy-sensitive two-year notes falling as much as six basis points to 4.10%.

The repricing in the rates market weighed on the euro, which slipped as much as 0.3% to a one-week low at $1.0671. The currency has been under pressure since French President Emmanuel Macron called a snap election following his party’s poor performance at the European Parliament elections.

“The French PMIs are out and we’re maybe getting the first glimpses of the contagion from the political turmoil to the real economy,” said Valentin Marinov, head of G-10 foreign-exchange research and strategy at Credit Agricole. The positive impact from the Euro 2024 football tournament, which is being hosted by Germany, seems to be “already starting to fade as well,” he said. 

The pound is also taking a hit from growing expectations that rate cuts are imminent, falling to a five-week low versus the dollar. It has lost around 0.3% so far this week, putting it on track for its third straight week of losses.

--With assistance from James Hirai and Naomi Tajitsu.

(Updates with additional quote in paragraph four.)

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