Gold prices extended losses on Monday after renewed U.S. and Iranian strikes over the weekend lifted oil prices and reinforced concerns that a fresh inflation shock could keep the Federal Reserve on a hawkish path, weighing on the appeal of non-yielding bullion.

At 01:05 ET (05:05 GMT), XAU/USD fell 1.54% to $4,057.76 an ounce, while Gold Futures slipped 1.17% to $4,065.45 an ounce. XAG/USD fell 2.80% to $58.19 an ounce, while XPT/USD declined 1.61% to $1,604.60.

The conflict in the Middle East intensified over the weekend after the U.S. carried out another round of strikes on Iranian targets following an attack on a Cyprus-flagged cargo vessel in the Strait of Hormuz. Although Tehran said the key shipping route would remain closed until further notice, U.S. officials disputed the claim, highlighting the fragile state of ceasefire negotiations.

Rising oil prices revive inflation concerns

Oil prices remained more than 3% higher after paring an earlier rally of nearly 5%, as traders continued to price in the risk of supply disruptions through the Strait of Hormuz despite hopes the conflict will remain contained.

The prospect of sustained energy price gains has revived fears of another inflation shock, reinforcing expectations that the Federal Reserve may have to keep interest rates elevated for longer. Higher yields and a firmer dollar tend to reduce the appeal of non-interest-bearing assets such as gold.

Minutes from the Fed’s June meeting released last week already showed several policymakers believed there was a case for raising interest rates, while officials broadly expressed greater concern over inflation pressures even as worries about the labor market eased. The next Federal Reserve meeting is slated for July 28-29. 

CPI, Fed testimony key for gold outlook

Investors are now awaiting Tuesday’s U.S. consumer price index report and Federal Reserve Chair Kevin Warsh’s first congressional testimony for further clues on the interest-rate outlook.

According to Tony Sycamore, market analyst at IG, gold remains highly sensitive to both geopolitical developments and incoming U.S. inflation data.

He said gold found support near the psychologically important $4,000 level last week, and a sustained break above $4,200-$4,220 would strengthen the case for a broader recovery toward the 200-day moving average near $4,491.

However, Sycamore warned that a stronger-than-expected CPI report could reinforce expectations for another Fed rate hike before year-end and bolster the greenback, adding pressure on bullion. A softer inflation reading, by contrast, could help gold stabilize after recent losses.

The US Dollar Index edged higher by 0.3% on Monday, adding further pressure on dollar-denominated bullion.