* Investors focus on data to gauge ECB policy * German bonds seen rallying if data disappoints * German yields to struggle to break below 1.20 pct By Ana Nicolaci da Costa LONDON, April 16 (Reuters) - Bund futures crept lower on Tuesday with investors cautious before the release of data which could provide clues on the European Central Bank's next policy move. German debt could resume a recent rally if euro zone inflation data and Germany's ZEW economic sentiment indicator due later this session support the case for a rate cut later this year. European Central Bank President Mario Draghi said the central bank was ready to act to revive the economy and would watch incoming data at its last post-meeting news conference, making economic releases particularly important. "The risk is for having softer data and then it will drive a rally in German bonds," said Alessandro Giansanti, senior rate strategist at ING, referring to the ZEW release. But, at the most, he expected 10-year German yields to fall to 1.20 percent. Below that, investors would be tempted to switch to other safe but higher-yielding debt. "For me, the biggest part of the rally has already happened, I don't expect 10-year yields to go much lower from this level," Giansanti added. German Bund futures were down 9 ticks at 145.94, leaving 10-year yields little changed at 1.25 percent. With German bond yields close to the "crisis level" troughs seen last year, when a euro zone break-up was considered by many as a realistic possibility, and French and Dutch yields near record lows, a recent rally had stalled. French borrowing costs over 10 years were unchanged at 1.80 percent and the Dutch equivalent was flat at 1.49 percent, with bonds having benefited recently from the expectation of Japanese flows after the Bank of Japan announced a massive stimulus plan. "We have got a fair bit of data," one trader said. "There is very low conviction out there. People don't seem to have any idea on what they should be doing. Presumably (the market) will (be watching to) see which way the data goes." Ten-year Italian and Spanish yields were choppy and last stood at 4.32 percent and 4.74 percent respectively. Later in the day, attention will fall on inflation and industrial output data out of the United States where investors are trying to determine the timing of a potential unwinding of ultra-easy Federal Reserve policy. According to a survey conducted by the New York Fed, primary dealers said they expected the U.S. central bank to begin to wind down its asset purchases in December. Two bomb explosions in Boston unnerved U.S. financial markets in the previous session but had little apparent impact on euro zone sovereign debt markets. Three people were killed and more than 100 injured in the worst bombing on U.S. soil since security was tightened after the attacks of Sept. 11, 2001.

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