PRECIOUS-Gold edges higher from over 1-1/2-month low but higher yields cap gains

(Recasts for EMEA morning hours)

* US 10-year Treasury yields rise to their highest since February 2025

* Brent rises above $110/bbl on fresh Middle East tensions

* Traders see 40% chance of a US interest rate hike in December

By Noel John

May 18 (Reuters) - Gold edged higher on Monday from a more than one-and-a-half-month low hit earlier in the session, although gains were capped as rising fears of inflation and elevated interest rates pushed global bond yields higher.

Spot gold was up 0.2% at $4,546.04 per ounce, as of 0907 GMT, after hitting its lowest level since March 30 earlier in the session. U.S. gold futures for June delivery lost 0.3% to $4,549.70.

"The decline (in gold prices) is technically stretched, and markets don't seem ready to let gold drop into a bear territory as the structural case for gold remains intact, helping it find support," said Nikos Tzabouras, a senior market analyst at Jefferies-owned Tradu.com.

However, "with markets pricing out any Federal Reserve rate cuts (this year) and hike bets on the rise, higher-for-longer prospects are dealing a direct blow to non-yielding assets like gold," he added.

Bonds from Tokyo to New York extended losses on Monday, with benchmark 10-year U.S. Treasury yields climbing to their highest since February 2025, as rising energy prices from the ongoing Middle East war fanned inflation fears and stoked investor wagers on rate hikes from global central banks.

Brent crude oil rose above $110 a barrel as efforts to end the Iran war appeared to have stalled, keeping the key waterway of the Strait of Hormuz largely closed.

Traders are now increasingly pricing in a U.S. interest rate hike before year-end, with a 40% chance of a hike in December, according to CME Group's FedWatch tool. Meanwhile, banks have started trimming their near-term gold price forecasts due to softer investor demand, with J.P.Morgan among the first major lenders to cut its 2026 average gold price forecast to $5,243 per ounce from $5,708.

"While the coming weeks could still be quite volatile over the twists and turns in negotiations and interest rate repricing, this resolution (to U.S.-Iran war) is key to beginning to re-stoke investor interest and demand for gold," analysts at the bank noted.

Spot silver rose 0.1% to $75.99 per ounce, platinum was steady at $1,973.32, and palladium was up 0.3% at $1,416.55. (Reporting by Noel John in Bengaluru; Editing by Rashmi Aich)