Traders have aggressively increased bets on European Central Bank (ECB) interest rate hikes, with swaps markets now fully pricing in two 25-basis-point increases by year-end—a stark contrast to just one hike priced in Friday. Rising energy costs, driven by Middle East production cuts and persistent Strait of Hormuz disruptions, have intensified fears of sustained inflation. Gas prices surged 30% on Monday, while Brent crude breached $100 a barrel, signaling escalating pressure on the ECB to tighten policy.

The market’s revised outlook reflects a dramatic shift in inflation expectations. A first hike is now nearly fully priced for June, up from 50% last week. Analysts attribute this to soaring energy prices, which have pushed Eurozone inflation forecasts beyond the ECB’s 2% target. The central bank faces mounting pressure to act swiftly, though officials have maintained a data-dependent stance despite mounting evidence of a supply-driven price shock.

Swaps pricing implies traders expect the ECB to prioritize inflation control over growth concerns, even as Eurozone GDP growth slows. Businesses reliant on energy imports, such as automakers and chemical firms, are already flagging margin pressures. The trajectory suggests a bumpy path for European markets, with rate-sensitive sectors potentially facing near-term volatility.

ECB’s policy pivot could have far-reaching consequences, including higher borrowing costs for households and corporates. While the central bank has not yet confirmed a timeline, the market’s aggressive pricing indicates a growing consensus that two hikes are inevitable. Investors are closely monitoring inflation data and geopolitical developments for cues on the bank’s next move.