The strong economic indicators offered additional support for a possible rise in interest rates in the United States, helping to make the US Dollar stronger.
Last week, I pointed out that the Fed decision may adversely affect stock, bond markets. However, the current rise in US 10-year bond yields, coupled with declining bond prices, has generated considerable worries, particularly as yields have reached their highest levels in years.
The recent global sell-off in bonds has adversely affected the stock markets, with yields now at their highest since 2007. After briefly peaking at 5.225 percent, the yields have settled around 5.165 percent. Investors are increasingly seeking higher returns due to persistent inflation, escalating US government debt, which has reached $40.1 trillion and ongoing pressures in the energy sector worsened by the conflict between the US and Iran.
Although oil prices have decreased because of renewed optimism regarding potential progress and the possible reopening of the Strait of Hormuz, the higher bond yields have not prevented a late recovery in the stock market prior to the New York close on Friday.
This recovery has been linked to positive advancements in artificial intelligence (AI) along with trade and investment related issues.
On the geopolitical front, US President Donald Trump and Chinese President Xi Jinping have engaged in constructive discussions with their technical teams, with both nations planning to convene in China to address AI safety concerns.
It is essential to note that these favourable advancements do not suggest that persistent issues such as unrest in the Gulf area, increasing oil prices, trade conflicts, and inflation will be quickly addressed.
The dynamics surrounding oil continue to play a central role in these issues. Disruptions to oil supply in the Strait of Hormuz, coupled with potential threats posed by the Houthis, remain major concerns for the global economy.
While ongoing negotiations between the United States and Iran are promising, they require resolution.
The average daily oil flow has yet to reach even half of the pre-war levels, with tanker traffic significantly lower than before the conflict.
As per International Energy Agency (IEA) data, in August, oil flows averaged 7.6 million barrels per day.
Despite a dip in West Texas Intermediate (WTI) crude prices to $ 92.50 per barrel, Brent crude prices remain elevated due to a “war premium” linked to ongoing geopolitical tensions.
The prevailing risk premium arises from fears that renewed blockades of the Strait of Hormuz or attacks on key Saudi facilities could cause a sharp increase in oil prices.
In the worst-case scenario, diesel and jet fuel prices could remain a concern, a problem caused due to elevated freight and war-risk insurance premiums.
Even if ongoing negotiations produce progress, it is unlikely that Brent crude prices will fall to around $ 85-90 per barrel in the near term, which will not reduce inflationary pressures. Notably, the daily shortfall of 10 million barrels continues to be a significant issue.
On the domestic economic front, the Federal Reserve has indicated that it may either maintain current interest rates or opt for an increase should inflation continue to escalate. The 10-year US bond yield, currently at 5.165 percent, is causing considerable uncertainty, as market sentiment no longer regards this as a mere temporary spike in oil prices. The Federal Reserve appears aware of the implications of rising oil premiums, which are worsening the existing inflationary challenges affecting consumers in the United States.
Globally, countries such as those in Europe and Japan are similarly impacted by soaring oil prices, which hinder their economic performance and complicate their finance strategies as the demand for higher returns has driven bond yields upwards.
Consequently, the upcoming five to ten weeks are poised to be critical for the US bond market, potentially swinging within a range of 4.95 percent to 5.45 percent.
The development of geopolitical tensions in the Gulf will have a major impact on energy prices and market trends.
Surging oil prices are putting significant pressure on the Japanese Yen, requiring a larger amount of US dollars for oil purchases, which is largely draining its foreign exchange reserves.
The Bank of Japan (BOJ) often steps in when there are disruptions in the foreign exchange market.
However, to maintain adequate foreign exchange reserve levels, the Bank of Japan (BOJ) has had to sell US bonds, which has resulted in a decline in foreign securities by approximately $88 billion.
The foreign exchange reserves stand at around $1.208 trillion, and the BOJ’s strategy seeks to prevent US bond sales. Consequently, to support JPY, the United States has engaged in small-scale purchases of USD/Yen pairs, while the BOJ raised its interest rates.
Japan has also looked into ways to obtain dollars using Treasuries instead of selling them off.
Should oil prices surge to between $115-120 per barrel, the impact on Japan’s current account would exert further pressure on the yen.
Similarly, the European Central Bank (ECB) is under considerable strain, anticipating that shocks from the Middle East will persist, which has led markets to price in additional interest rate hikes unless oil prices decline. Therefore, the forthcoming movements in the Euro will largely hinge on oil prices, with rising prices likely pressuring the Euro down to approximately 1.12, while falling prices could push it above 1.16.
In its recent meeting, the Bank of England (BoE) opted not to raise interest rates, remaining behind the ECB and facing increased political scrutiny.
The Bank Rate currently stands at 3.75 percent, with a recent vote reflecting a 6-3 decision to hold steady.
The upcoming meeting on November 5 will greatly depend on energy prices, as elevated oil prices are harmful to the British Pound, which is likely to decline should energy prices ease.
Meanwhile, gold prices are seeking a more definitive direction this week, with key support observed at $4175 and potential resistance at $4425 that could prompt further gains to $ 4480.
WEEKLY OUTLOOK - Sept 28-Oct 2
#GOLD @ $4285- Gold has been holding the support level at $4220, which is crucial to monitor. A drop below this could lead to a decline towards $4150. On the upside, it must rise above $ 4388 in order to target $4450.
#EURO @ 1.1391- EURO has support at 1.1310. If it maintains this level, it could rise to 1.1470-80. However, if it breaks through the support, it may drop to 1.1250.
#GBP @ 1.3246- As long as the Pound Sterling remains above the support level of 1.3160, it has the potential to rise to 1.3330 or 1.3390. A breach of the support level poses a risk of dropping to 1.3090.
#JPY @ 157.29- The $/JPY currency pair needs to surpass the 158.98 mark in order to reach 160.18. On the other hand, if it falls below 156.10, there is a risk of dropping to 155.40.
Copyright Business Recorder, 2026
The writer is former Country Treasurer of Chase Manhattan Bank. The views expressed in this article are not necessarily those of the newspaper
He tweets @asadcmka