Gold prices edged lower on Thursday after briefly reaching their strongest level in more than two months, as traders reconsidered the outlook for Federal Reserve policy following softer U.S. inflation data. While the CPI reading reduced expectations for an imminent interest-rate increase, persistent energy-market risks linked to the Iran conflict remain a potential source of inflationary pressure. At 01:54 ET (05:54 GMT), XAU/USD was down 0.5% at $4,388.64 an ounce, while Gold Futures fell 0.5% to $4,446.12. XAG/USD declined 0.4% to $65.08 an ounce and XPT/USD dropped 0.6% to $1,746.71.
Gold gives back part of post-CPI rally
Bullion advanced as much as 0.9% on Wednesday, reaching approximately $4,450 an ounce and setting a fresh two-month high before losing momentum.
The move followed U.S. inflation figures showing consumer prices increased just 0.1% in July from the previous month, matching expectations. Gold initially gained around 1% as the data suggested that the energy shock caused by the Iran conflict had yet to generate a substantial acceleration in broader inflation.
Traders responded by scaling back expectations for another Federal Reserve rate increase. CME FedWatch indicated that the probability of a September hike had fallen to roughly 38%-40%, compared with 46% immediately before the CPI release.
The Fed left its benchmark interest-rate range unchanged at 3.50%-3.75% in July, although three policymakers voted in favour of raising rates.
Investors will now assess Thursday’s U.S. producer price data for further evidence on inflation before the September policy meeting.
More employment and inflation releases are scheduled before that decision, while Fed Chair Kevin Warsh’s appearance at the Jackson Hole symposium later this month will be closely watched for indications of the central bank’s assessment of inflation and economic growth.
Because gold does not offer a yield, expectations for higher interest rates tend to reduce its relative appeal.
Energy prices remain a potential inflation threat
The softer CPI reading provided an initial boost to precious metals, but some of that reaction has faded as investors continue to assess the inflationary implications of elevated energy prices.
Efforts to resolve the U.S.-Iran conflict and restore shipping through the Strait of Hormuz remain uncertain, with the strategically important route still operating under severe restrictions.
Oil prices are heading for a weekly advance as traders monitor diplomatic efforts between Washington and Tehran. A prolonged disruption to energy supplies could keep prices elevated and complicate the Federal Reserve’s inflation outlook.
Meanwhile, the US Dollar Index was little changed near 99.96. Lower Treasury yields and earlier weakness in the dollar had helped fuel gold’s rally, but both supportive moves have since moderated.
Chinese buying strengthens underlying demand
Gold has continued to attract buyers after successfully holding above the key psychological threshold of $4,000 an ounce.
Chinese demand remains an important source of support. The People’s Bank of China has extended its run of bullion purchases, while broader investor appetite for gold has improved following the previous correction in prices.
Technical signals have also become more constructive. Gold moved above its 100-day moving average this week for the first time since April, strengthening the improving technical backdrop.
Tony Sycamore, senior market analyst at IG, said gold’s overnight pullback from around $4,441 reflected profit-taking ahead of the CPI release, while hawkish Federal Reserve commentary and higher energy prices also contributed to selling pressure.
He said the recovery has brought bullion towards downtrend resistance around $4,450, a level derived from the late-January record near $5,602. Gold’s 200-day moving average near $4,499 could provide another significant hurdle if prices attempt to extend their rebound.
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