(Updates after morning trading)

LONDON, July 31 (Reuters) - Money markets pared back

bets on European Central Bank rate cuts on Thursday and now

expect no more ECB easing this year, pushing Germany's rate

sensitive two-year yield to a three-month high.

Markets now see just a 44% chance of a 25 basis point

ECB rate cut this year, having seen a 25 bp

cut as all but certain last week before the announcement of the

EU-U.S. trade deal and the ECB meeting.

At that meeting, the central bank left interest rates

unchanged and offered a modestly upbeat assessment of the euro

zone economy, though markets largely reacted to a press

conference from ECB president Christine Lagarde in which she

suggested that the bar for further cuts is high.

Germany's two-year yield rose nearly three basis points

on Thursday to as high as 1.965%, its highest since early April.

Rohan Khanna, head of euro rates strategy at Barclays,

said that at the press conference Lagarde had sounded dismissive

of any factor that could put a dovish spin on the bank's policy

path.

Thursday inflation data

from some of the euro zone's biggest economies also gave no

reason for further rate cuts, showing price rises at or just

above expectations this month, suggesting Friday's bloc-wide

data will hold near the ECB's 2% target.

Some policy makers had expressed concern last month that

inflation could dip significantly below that target,

necessitating further rate cuts, but these fears look less

likely to be realised.

Longer dated bond yields dipped slightly, however,

causing curves to flatten in market parlance.

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

zone, dropped around 1 basis point to 2.70%, reversing a small

move the day before.

It is now around 73 bps higher than the two-year yield,

making the curve its flattest in a month, albeit after

substantial steepening this year.

Longer dated bonds were helped at the margin by a small

decline in longer dated Japanese yields after a Bank of Japan

policy statement caused market participants to push out

expectations for any future interest rate hike.

Still to come is U.S. PCE inflation data, the Federal

Reserve's preferred inflation gauge, which is due at 1230 GMT.

It is probably more important for markets than European

inflation data now that is around target.

The Fed kept rates on hold on Wednesday and said it was

still in the early stages of understanding how President Donald

Trump's policies, including on trade, will affect inflation,

jobs and economic growth.

Other moves were largely in line with the German benchmark.

Italy's 10-year yield was down 1 bps at 3.54%, maintaining its

gap with Germany at 82.4 bps, holding around its tightest in

years.