European shares gained on Wednesday, supported by a drop in euro zone bond yields ahead of the release of crucial U.S. inflation data and the outcome of the Federal Reserve's policy meeting later in the day.

The pan-European STOXX 600 was up 0.5% as of 0837 GMT, after two sessions of declines amid French political uncertainty.

"What European investors will be looking from the Fed is to see if there are really credible signs that they could cut rates this year," said Altaf Kassam, EMEA head of investment strategy and research at State Street Global Advisors.

"(The market is) just trying to get a feeling if inflation is remaining sticky or is actually coming down (and) what that means for the Fed rate cut projections."

Most sectors traded higher, with a 1.3% gain in European lenders being the biggest boost, while automobile stocks underperformed with a 1% drop.

European equities hit record highs last week after the European Central Bank's first rate cut in five years but have since pulled back due to political tremors domestically and as hot U.S. jobs data dimmed hopes of an early Fed rate cut.

The Fed is widely expected to keep rates unchanged

, but the focus will be on its forecast for rate cuts. Market participants expect the so-called dot plot to be whittled down to one or two rate cuts this year, from the three indicated in March.

The U.S. rate futures market is pricing in one cut in 2024, most likely in November or December, per LSEG calculations.

Meanwhile, data showed inflation accelerated in Germany last month due to higher service prices, confirming preliminary data. The country's benchmark DAX index added 0.5%.

Shares of Umicore fell 5.7%, among the most on the benchmark index, after the Belgian metal recycling group issued a profit warning, becoming the latest supplier hit by a slowing electric vehicle market.

Legal & General dropped 3.4% after the British insurer's investors were disappointed by plans for a 200 million pound ($255 million) share buyback and a merger of its investment unit.

Rentokil Initial jumped 12% after a report said Nelson Peltz's Trian Fund Management had amassed a significant stake in the British pest-control firm.

Separately, Bank of France chief and ECB policymaker Francois Villeroy de Galhau said the country needs quick clarity around the budget strategy for the country once a snap parliamentary election is over. (Reporting by Shristi Achar A in Bengaluru; Editing by Sherry Jacob-Phillips and Savio D'Souza)