Gold prices moved lower during Thursday's Asian session, drifting towards the US$4,000 level as renewed fighting between the United States and Iran fuelled concerns that higher oil prices could reignite inflation.
By 4:25 p.m. AEST (6:25 a.m. GMT), spot gold was down 0.7% at US$4,031.47 an ounce.
The precious metal came under pressure as the U.S. dollar recovered from recent losses, supported by shifting expectations for Federal Reserve policy following this week's inflation data.
Geopolitical tensions remained elevated after the United States reimposed a naval blockade on Iranian ports in the Strait of Hormuz, prompting another exchange of military strikes between Washington and Tehran.
The U.S. Central Command (CENTCOM) said it had launched another wave of strikes against Iranian targets in an effort to keep the Strait of Hormuz open to international shipping.
The ongoing conflict has kept oil prices near one-month highs, raising concerns that higher energy costs could fuel inflation and complicate the Federal Reserve's policy outlook.
While softer U.S. inflation data earlier this week eased expectations of an immediate interest rate increase, markets continue to anticipate at least one further rate hike later this year.
Gold initially found support following June's inflation reports, with buyers stepping in after weaker-than-expected price data reduced expectations of near-term policy tightening.
On Tuesday, core U.S. Consumer Price Index (CPI) inflation, which excludes food and energy, was unchanged on the month, bringing the annual rate down to 2.6%, below market expectations.
That was followed on Wednesday by a softer Producer Price Index (PPI) report, which showed wholesale prices fell 0.3% in June after May's increase was revised down to 0.6%.
According to the CME Group FedWatch Tool, markets now assign a 11.2% probability of a July rate hike, down sharply from around 24.6% a week ago.
However, investors continue to price in a 53.4% odds of an increase at the September meeting.
Attention now turns to Thursday's U.S. economic data, with retail sales and weekly jobless claims expected to provide further clues on the strength of the economy and the Federal Reserve's next policy move.
