Gold extended its recent decline during Wednesday's Asian deals, falling to its lowest level since March as investors awaited key United States inflation data and continued to favour the U.S. dollar amid persisting tensions in the Middle East.
By 3:40 pm AEST (5:40 am GMT), spot gold was down 1.6% at $4,193.72 per ounce, leaving the precious metal near three-month lows and below the closely watched $4,200 level.
Investor hopes for a diplomatic resolution were dealt a setback after the United States launched strikes against Iran.
The action followed accusations by President Donald Trump that Tehran had shot down an American Apache helicopter operating near the Strait of Hormuz.
In response, the Iranian Islamic Revolutionary Guard Corps (IRGC) said on Wednesday that it had struck 21 U.S. military targets across the Middle East, further heightening geopolitical tensions.
Despite gold's traditional role as a safe-haven asset during periods of uncertainty, traders have instead favoured the U.S. dollar amid expectations that the conflict could contribute to inflationary pressures and keep U.S. interest rates elevated.
Market attention is now firmly focused on the release of the U.S. consumer price index (CPI), which is expected to provide fresh insight into inflation trends and the likely path of Federal Reserve policy.
Investors are particularly watching for signs that higher energy prices linked to the conflict are feeding through to broader inflation.
According to the CME Group FedWatch Tool, markets are currently pricing in a 42.9% probability of a 25 basis point (bp) interest rate increase and a 21.4% chance of a larger 50bp hike before the end of the year.
Markets expect annual core CPI inflation to rise to 2.9% in May from 2.8% in April, while the headline figure is expected at 4.2%.
On a monthly basis, core CPI is forecast to increase 0.3%, following a 0.4% rise in the previous month.
Core inflation excludes volatile food and energy prices.
A stronger-than-expected inflation reading would likely reinforce expectations that the Fed may need to tighten policy further, potentially lifting the U.S. dollar and placing additional pressure on gold prices.
Conversely, softer inflation figures could temper expectations for future rate increases, easing support for the greenback and potentially providing some relief for gold after its recent sharp decline.
