Traders Raise Bets on Two ECB Rate Hikes in 2026 Amid Stronger Inflation Signals

Traders have sharply increased their bets on European Central Bank rate hikes, now fully pricing in two 25-basis-point increases in 2026, according to interest rate swap data. This shift marks a significant reversal from earlier market sentiment, which had priced in only one hike or even rate cuts by mid-year. The updated outlook reflects growing confidence that eurozone inflation remains stubbornly above target, with recent data showing headline CPI holding at 2.8% year-on-year in February, well above the ECB’s 2% target. The market’s recalibration is having a direct impact on fixed income and currency markets. The 10-year German government bond (BUND) yield rose to 2.47% on March 8, its highest level since late 2023, as investors anticipate tighter monetary policy. EURUSD responded strongly, climbing to 1.0920, a level not seen since November 2024, signaling renewed confidence in the euro’s strength. The implications extend beyond the eurozone. Higher European yields are increasing the appeal of euro-denominated assets, putting upward pressure on global bond yields and affecting risk appetite. Financial markets are also pricing in a steeper yield curve across the eurozone, with the 2-year BUND premium over the 10-year rising to 115 basis points, the widest gap since early 2023. This suggests expectations of a prolonged pause after the hikes, or a potential reversal in the future. Institutional investors and asset managers are adjusting portfolios in anticipation, reducing duration exposure in eurozone fixed-income holdings and increasing allocations to short-dated government paper. The shift underscores a broader reassessment of central bank policy divergence, with the ECB now seen as more hawkish relative to the Federal Reserve, which maintains a cautious stance on rate cuts.