Traders have fully priced in expectations for two interest rate hikes by the European Central Bank within the year, following attacks on Iranian energy assets that reignited concerns over surging inflation. Euro interest rate swaps indicate a 50-basis-point increase by 2026, the first such pricing since March 9. The ECB is set to announce its latest policy decision on Thursday, with economists and money markets widely anticipating that the central bank will maintain the deposit rate at 2%. Market focus is expected to shift to the remainder of the year.

The revision in expectations comes after oil prices and European natural gas prices surged on Wednesday, following Iran's claim that its South Pars gas field was attacked by the United States and Israel. European government bonds reversed earlier gains, with the yield on two-year German government bonds rising 9 basis points to 2.47%, the highest level since August 2024. The euro also gave up its earlier gains, falling 0.2% to $1.1512.