100% chance of ECB rate hike this year, up from near-certain cut just a week ago, as Iran war stokes inflation fears, sending German bond yields up 30bps. This dramatic shift from a contrarian bet to consensus view is rippling through global markets, pushing US Treasury yields higher and forcing a rethink of Fed policy expectations. The euro area's vulnerability to energy shocks, importing oil and gas from volatile regions, makes it particularly susceptible to a rerun of 2022's inflation spike, prompting the ECB to signal vigilance despite current moderate growth and inflation near target.

Barclays Plc rates trader Lucile Flight argues the ECB won't hesitate to react to energy price shocks, while Aviva Investors' Steve Ryder, a long-time German bond bear, notes his position was based on growth and spending, not the war. Ryder sees a scenario where sustained high energy prices could justify action, but doubts current levels are sufficient. This rapid shift surprises even seasoned market watchers, contrasting sharply with just days ago when an ECB hike wasn't on most investors' radar, and some even anticipated cuts.

Not all analysts agree the war mandates immediate hikes. Futures First Canada Inc.'s Rishi Mishra argues the market is overconfident, pointing to differences from 2022's stimulus and supply issues. He warns a rapid position unwind is exacerbating moves, as carry trades in riskier euro debt markets face a "position washout" requiring a significant drop in hostilities for confidence to return.