(Updates at 0953 GMT)

By Samuel Indyk

LONDON, May 15 (Reuters) - Germany's 10-year bond yield

fell below the key 2.5% level on Wednesday before U.S. consumer

prices data that could help determine whether the Federal

Reserve will lower borrowing costs this year and by how much.

Germany's 10-year yield, the benchmark for the

euro zone bloc, was last down 5 basis points at 2.49%.

"I haven't seen anything specific this morning that led to

the move we're now seeing," said Peter Schaffrik, global macro

strategist at RBC Capital Markets.

"The key event is the U.S. CPI figures later on and Europe

has probably followed a little from where the U.S. was leading."

The benchmark U.S. 10-year yield fell to a

one-month low of 4.418% on Wednesday, a day after the release of

higher-than-forecast producer price inflation data.

The figures provided a short-lived lift to global bond

yields which quickly retraced as markets digested the details

from the report.

"Yesterday's PPI data didn't really move the needle much

with a notable beat balanced by some notable down revisions and

some of the details being neutral for core PCE," Jim Reid, head

of global fundamental credit strategy at Deutsche Bank said in a

note, referring to the Federal Reserve's targeted measure of

inflation.

"So the focus will now shift to April's CPI after 3 upside

surprises in a row for core CPI."

Economists polled by Reuters expect core CPI to rise by 0.3%

in the month, down from 0.4% in March, for an annual gain of

3.6%, down from 3.8%.

A higher-than-forecast reading could again see markets

further trim their expectations for easing this year and push

back when they expect the Fed to begin cutting interest rates.

Money market traders were now only pricing around 40 basis

points of rate cuts from the Fed this year, down from around 160

basis points at the start of the year, as economic growth

remained robust and the disinflation process slowed.

For the European Central Bank, traders are pricing around 70

basis points of rate cuts this year, or just under three

quarter-point moves.

And while the ECB is expected to move earlier than the Fed

in 2024, analysts think the likelihood of prolonged easier ECB

policy while the Fed keeps rates higher for longer remains slim.

"We have never been a believer in the divergent story,"

RBC's Schaffrik said.

"I cannot see an environment where we have a full cutting

cycle and disinflationary trends in Europe and the opposing view

in the U.S. The economies are just too intertwined."

The spread between U.S. 10-year Treasuries and German Bunds

was last at 193 bps, having widened to around 220

basis points in the middle of April.

Meanwhile, data on Wednesday showed that the euro zone

economy grew 0.3% in the first quarter, suggesting a slow

recovery is underway after six straight quarters of stagnant or

negative growth.

Italy's 10-year yield was lower by 7 bps at

3.81%, and the gap between Italian and German bunds

widened to 132 bps.

(Reporting by Samuel Indyk; Editing by Andrew Heavens and

Emelia Sithole-Matarise)