Dollar and Treasury Yields Surge as Middle East Oil Risks Escalate

Market Wrap-up: Oil Supply Risks and Surging Treasury Yields Fuel Fed RepricingMarket attention remained firmly centered on the Middle East, where the ongoing conflict continues to disrupt global energy flows and intensify inflation concerns. The market is now increasingly pricing in the possibility of another Fed rate hike in December, marking a sharp reversal from expectations before the conflict escalated.

IEA Executive Director Fatih Birol warned that global commercial oil inventories are falling rapidly and may only cover several more weeks of demand due to the impact of the Iran conflict and the closure of the Strait of Hormuz.

Supply concerns intensified further after the latest API report showed US crude inventories fell by 9.1 million barrels, significantly larger than the market expectation for a 3.4 million-barrel drawdown. The data pointed to stronger-than-expected demand conditions or an increasingly tight supply environment.

The decline followed the previous week’s 2.188 million barrel draw, reinforcing the ongoing trend of shrinking inventories. While global reserves have not yet reached critical levels, the pace of the decline has become the market’s primary concern.

At the same time, around 10-12 million barrels per day remain disrupted from global markets due to the Strait of Hormuz situation, while producers have yet to fully offset the shortfall.

WTI crude extended gains during the previous session and climbed toward $104 per barrel. Meanwhile, the US Dollar Index rose back to a more than one month high at 99.43, adding pressure across major currency pairs. The Canadian Dollar remained the main exception as higher oil prices continued to support the currency.

Rising energy prices are becoming an increasingly critical issue for President Donald Trump. During the previous session, Trump largely reversed his earlier stance from Monday regarding a temporary pause in military action against Iran. He also signaled a potential 2-3 day deadline and warned that the US may need to launch another strike against Iran. In parallel, NATO is reportedly considering troop deployment near the Strait of Hormuz if the waterway is not reopened before July.

US Treasury yields also surged during the previous session, with the 30 year yield reaching its highest level in 19 years, while the 10 year yield climbed to its highest level since January 2025. Markets interpreted the recent stronger than expected economic data as evidence that inflation pressures are reaccelerating as rising oil prices feed through the economy.

Higher yields weighed heavily on US equities, which closed lower, while gold prices fell more than 2% to 4,474 USD during the session as rising real yields and a stronger Dollar reduced demand for non-yielding assets.

Looking ahead, markets will continue monitoring developments in the Middle East while awaiting the release of the FOMC meeting minutes for deeper insight into policymakers’ assessment of economic and financial conditions and the future path of interest rates.

Gold: Gold Drops Over 2% While Rising Yields Pressure Bullion   

Key takeaway:

Gold prices fell more than 2% on May 19 as the stronger US Dollar and persistent inflation concerns reinforced expectations that the Fed may need to keep policy tighter for longer, pushing US Treasury yields higher.

At the same time, elevated oil prices continued to fuel concerns that global inflation may accelerate further as energy costs rise.

Markets are now focused on the release of the Fed’s latest meeting minutes later today for additional guidance on the monetary policy outlook.

Technical Outlook:

Daily Bias: Bearish.Support: 4,404Resistance: 4,550

WTI: WTI Climbs Above $104 Amid Iran Escalation and Tightening Supply 

Key takeaway:

WTI crude prices rallied sharply during Tuesday’s session after President Trump reversed Monday’s pause decision, signaling a 2-3 day deadline and warning that the US may need to launch another strike against Iran.

Meanwhile, NATO is reportedly considering troop deployment near the Strait of Hormuz if the passage is not reopened before July.

In addition, API reported that US crude inventories declined by 9.1 million barrels in the week ending May 15, far exceeding the expected 3.4 million barrel draw and more than four times larger than the previous week’s 2.188 million barrel decline.

Technical Outlook:

Daily Bias: Bearish.Support: 98.67    Resistance: 105.39

DXY: Dollar Index Hits Six-Week High on Hawkish Rate Repricing 

Key takeaway:

The US Dollar Index hovered near a six-week high following renewed threats from President Trump regarding Iran.

At the same time, the sharp rise in Treasury yields reflected growing concerns that inflation may remain elevated for longer than previously expected.

Anna Paulson stated that the current policy rate remains appropriate to maintain downward pressure on inflation, although further rate hikes could still become necessary if economic growth exceeds potential or if new inflation risks emerge.

Technical Outlook:

Daily Bias: Bullish.Support: 99.00Resistance: 100.00

EUR/USD: Euro Weakens Amid Aggressive Repricing in US Rates 

Key takeaway:

The Euro weakened sharply as rising US Treasury yields continued to dominate expectations surrounding potential ECB tightening.

ECB official Kocher stated that a June rate hike remains possible if there is no improvement in the Iran conflict.

In addition, Joachim Nagel echoed similar concerns, stating that the European Central Bank is gradually moving away from its baseline scenario and that “we may have to do something in June.”

Technical Outlook:

Daily Bias: Bearish.Support: 1.15662  Resistance: 1.16548

USD/JPY: Yen Holds Steady Despite Strong GDP Data and Intervention Warnings 

Key takeaway:

The Japanese Yen traded relatively stable as intervention concerns offset broader US-Iran geopolitical tensions.

Meanwhile, markets largely ignored Japan’s stronger than expected Q1 GDP data.

Japanese officials remain on high alert over the possibility of another round of currency intervention, which could provide support for the JPY and limit upside momentum in the pair.

Technical Outlook:

Daily Bias: Bullish.Support: 158.00  Resistance: 159.50

Oil remains the dominant macro driver across global markets. Supply disruption risks tied to the Strait of Hormuz continue to push crude prices higher, feeding directly into inflation expectations and forcing markets to reprice the Fed outlook toward a more hawkish path.

That repricing is now showing clearly across asset classes. Treasury yields continue to surge, the US Dollar remains firmly supported, while equities and gold are facing pressure from higher real rates and tighter financial conditions. Commodity-linked currencies such as the CAD are outperforming, while yield-sensitive assets remain defensive.

Markets are no longer trading purely on geopolitical headlines. The focus has shifted toward the inflation consequences of sustained high energy prices and whether central banks may need to respond with tighter policy again.

Attention now turns to the FOMC meeting minutes and any further escalation in the Middle East. Traders will be watching closely for signals on how concerned Fed officials are about energy-driven inflation risks and whether current market pricing for another rate hike continues to build.

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