Gold prices pare some losses after U.S. consumer inflation data

Gold prices on Wednesday pared some losses, after a key U.S. consumer inflation report came in slightly soft to in-line with expectations. Sentiment remained under pressure, however, amid escalating tensions in the Middle East.

At 09:02 ET (13:02 GMT), spot gold was down 2.5% to $4,152.81/oz, while gold futures slipped 2.5% to $4,179.05/oz.

The U.S. consumer price index (CPI) report showed headline CPI inching up 0.5% M/M and 4.2% Y/Y in May, matching consensus estimates. Core CPI, which strips out food and energy, rose 0.2% M/M and 2.9% Y/Y, versus estimates of 0.3% and 2.9%, respectively.

U.S. Treasury yields fell marginally while the dollar slipped after the inflation report. The U.S. dollar index, which tracks the greenback against a basket of currency peers, was last down 0.1%, hovering near a two-month peak hit earlier this week. A firmer dollar can dent the attractiveness of gold by making the yellow metal more expensive for overseas buyers.

The prospect of persistent, energy-induced inflation has prompted investors to bet on a possible interest rate increase by the Federal Reserve this year. More than 65% of market participants are pricing in a Fed rate hike in December, according to CME’s FedWatch Tool.

Higher interest rates tend to weigh on non-yielding bullion by increasing the opportunity cost of holding the precious metal.

Turning to the Middle East, the U.S. launched new strikes on Iranian targets early on Wednesday following the downing of a U.S. military helicopter near the Strait of Hormuz. Iran said it had targeted U.S. bases in Jordan and several Gulf states in response to the U.S. attacks.

Oil prices oscillated around the flatline, but remained well above pre-war levels. Driving the uptick has been the ongoing closure of the Strait of Hormuz, a vital waterway for a fifth of the world’s oil and liquefied natural gas.

"Participants continue to sit on the sidelines, given the market’s fluidity, uncertainty, and headline-driven nature," analysts at ING said in a note.