Surging Bond Yields and Middle East Geopolitics Weigh on Risk Sentiment

EUR/USD recovered toward the 1.1200 level during early Asian trading on Thursday as the US Dollar weakened. However, gains in the pair remained limited by renewed concerns over France’s fiscal position ahead of the 2027 presidential election.

French Prime Minister Sébastien Lecornu’s minority government has proposed a €54 billion savings plan aimed at containing the country’s growing deficit and avoiding a further deterioration in its sovereign debt outlook. Political uncertainty and doubts over the government’s ability to implement fiscal consolidation have increased pressure on French bonds, raising broader concerns about financial stability across the Eurozone.

The fiscal strain has also reduced expectations for further European Central Bank rate hikes, weighing on the Euro. Investors remain cautious as political resistance to spending cuts could make it more difficult for France to bring its budget deficit under control.

Meanwhile, minutes from the Federal Open Market Committee showed that Fed policymakers continued to view inflation as the main risk to the economic outlook. Markets are now pricing in a 22% probability of a 25-basis-point rate hike at the Fed’s October meeting, unchanged from the previous day.

Attention now turns to the US weekly Initial Jobless Claims report and further comments from Federal Reserve officials later on Thursday, which could provide fresh direction for the US Dollar and EUR/USD.

Gold prices edged higher during Thursday’s Asian session but remained below the $4,150 level as a resilient US Dollar limited the upside. The precious metal found some support as USD bulls paused following the Greenback’s recent rally to an 18-month high, although the broader environment remained challenging for non-yielding assets.

Minutes from the September 15–16 FOMC meeting showed that policymakers remained concerned about persistent inflation, with most officials seeing scope for another rate hike before the end of the year. Markets continue to expect the Federal Reserve to hold rates steady in October, while pricing around an 80% probability of another increase in December.

Elevated US Treasury yields and uncertainty over the inflation outlook, partly driven by volatile energy prices, have provided further support to the Dollar. Ongoing geopolitical tensions in the Middle East have also strengthened demand for the safe-haven Greenback, limiting Gold’s recovery potential.

Reports that the US military is preparing for the possibility of renewed major combat operations in Iran have added to concerns over further regional escalation. Any fresh geopolitical developments could increase market volatility and support demand for the Dollar.

Gold therefore needs stronger follow-through buying to confirm a sustained recovery from its recent two-month low. Traders will focus on US weekly Initial Jobless Claims and speeches from Federal Reserve officials for fresh clues on the interest-rate outlook, while geopolitical headlines are likely to remain an important driver of short-term moves in XAU/USD.

Oil prices climbed on Thursday as concerns over supply disruptions in the Middle East intensified amid a rise in attacks on shipping in the Gulf and the Strait of Hormuz.

The latest gains came despite the International Energy Agency’s decision to accelerate the release of oil stocks and prioritize diesel supplies in an effort to ease fuel shortages caused by disruptions linked to the Iran conflict. However, continued attacks on tankers have raised concerns over the security and cost of transporting crude through the Strait of Hormuz, a critical route that previously handled around 20% of global oil and fuel shipments.

A tanker north of Qatar was reportedly hit by multiple projectiles on Wednesday, adding to concerns that attacks on commercial shipping could intensify. Analysts noted that constrained supply flows, elevated logistics costs and the risk of further escalation are keeping oil prices supported, while strategic stock releases may provide only temporary relief without creating additional production capacity.

Supply concerns were also reinforced by a hurricane approaching US offshore production areas. Several energy companies have curtailed operations in the Gulf of Mexico, while more than 25% of current US Gulf oil production had been shut in as of Wednesday.

Meanwhile, US inventory data provided further support to crude prices, with domestic oil stockpiles falling by 3.2 million barrels in the week ended October 2, almost twice the decline expected by analysts. The combination of Middle East shipping risks, US production disruptions and falling inventories continues to underpin the oil market.

Wall Street ended lower on Wednesday, snapping a four-session winning streak, although the major averages recovered from their session lows as oil prices eased and Treasury yields pared earlier gains following a strong 10-year bond auction. The pullback came a day after US stocks reached record closing highs for the first time since mid-August.

Investors also focused on the minutes of the Federal Reserve’s September meeting, which showed that most policymakers believed another rate increase would likely be appropriate before the end of the year. Although expectations for an October hike have eased since the meeting, the minutes reinforced concerns that persistent inflation could keep monetary policy restrictive for longer.

Meanwhile, US Treasury yields remained elevated amid a broader bond sell-off driven by concerns over oil-related inflation, rising corporate debt issuance linked to artificial intelligence investment and growing fiscal pressures in major economies.

Despite the pressure from rising borrowing costs, equities have remained resilient, supported by renewed enthusiasm around AI stocks, expectations for strong third-quarter corporate earnings and previously softer inflation and labor-market data. Investors are now turning their attention to the upcoming earnings season, with major US banks including JPMorgan and Bank of America due to report next week.

With earnings season approaching and markets still sensitive to interest-rate expectations, bond yields, oil prices and further signals from the Federal Reserve are likely to remain key drivers for Wall Street in the sessions ahead.