(Reuters) – Oil gained 1% on Thursday to snap its three-day decline, as risk appetite returned to financial markets after the U.S. Federal Reserve kept benchmark interest rates on hold.

Brent crude futures rose $1.03, or 1.22%, to $85.66 a barrel by 1149 GMT, while U.S. West Texas Intermediate crude futures gained $1.02, or 1.27%, to $81.46 a barrel.

Oil’s rally tracked gains across financial assets after the Fed kept its benchmark interest rate unchanged at 5.25%-5.50% at its latest meeting on Wednesday.

“Asset markets reacted positively to the Fed yesterday and I think oil has followed that by moving a bit higher,” said Callum Macpherson, head of commodities at Investec.

Policymakers struggled to determine whether financial conditions may be tight enough already to control inflation, or whether an economy that continues to outperform expectations may need still more restraint.

U.S. inflation held at 3.4% in September for the third consecutive month.

“There is still some way to go to achieve the 2% target, nonetheless monetary tightening has been working effectively and additional rate increase would probably do more harm than good,” Tamas Varga, analyst at broker PVM, said.

Meanwhile in Europe, a contraction in manufacturing activity in the euro zone deepened in October, with Purchasing Managers’ Index (PMI) falling by 0.3 points on the month to 43.1. A score of below 50 signals contraction.

A Bank of England meeting later on Thursday is expected to result in interest rates being held steady.

Investors will also be watching for developments in the Middle East, which has kept oil markets on edge as a wider conflict could disrupt oil supplies around the region.

Fighting raged on around Gaza City on Thursday as advancing Israeli tanks and troops encountered fierce resistance from Hamas militants.