Gold prices recovered some ground on Tuesday after briefly trading at their lowest levels in two weeks, with bargain hunting emerging after the previous session’s sharp selloff as investors awaited U.S. inflation data and Federal Reserve Chair Kevin Warsh’s congressional testimony.

Persistent tensions in the Middle East and expectations that the Federal Reserve could keep interest rates elevated also remained in focus after hawkish remarks from Fed Governor Christopher Waller.

At 05:58 ET (09:58 GMT), XAU/USD rose 0.5% to $4,021.87 an ounce, while Gold Futures gained 0.55% to $4,027.22. XAG/USD advanced 0.78% to $58.10 an ounce, while XPT/USD added 0.34% to $1,609.82.

Middle East tensions keep inflation concerns in focus

Gold recovered after tumbling nearly 3% on Monday, its steepest one-day decline in more than a month, with the metal briefly falling below the $4,000-an-ounce mark for the first time in three weeks.

The latest bout of selling came as the conflict in the Middle East intensified. President Donald Trump said the United States would reinstate its blockade of Iranian shipping in the Gulf and declared Washington the "Guardian of the Hormuz Strait," proposing a 20% fee on cargoes transiting the strategic waterway. The move marked a sharp escalation in U.S. pressure on Tehran and raised doubts over the durability of the fragile truce reached in June.

Crude prices extended recent gains as investors assessed the risk of renewed supply disruptions through the strategic waterway, reviving concerns that higher energy costs could fuel inflation and complicate the Federal Reserve’s efforts to return price growth to its target.

For bullion, the inflation outlook presents a double-edged sword. Rising energy costs can enhance gold’s appeal as a store of value, but if they also strengthen expectations for tighter monetary policy, the resulting increase in bond yields and the dollar can outweigh that support.

Waller comments boost July rate hike expectations

Further weighing on bullion, Federal Reserve Governor Christopher Waller said policymakers may need to raise interest rates in the near term if underlying inflation continues to point to broad-based price pressures.

ANZ analysts said the latest escalation in the Middle East had reinforced expectations that higher energy prices could keep inflation elevated, increasing the likelihood of tighter monetary policy. The brokerage noted markets are now pricing in a 43% probability of a rate hike at the Fed’s July 28-29 policy meeting.

Higher borrowing costs typically reduce the appeal of non-yielding assets such as gold by increasing the opportunity cost of holding bullion, while also lending support to Treasury yields and the U.S. dollar.

Investors are now awaiting June U.S. consumer price data and Federal Reserve Chair Kevin Warsh’s congressional testimony later Tuesday, with both events expected to help shape expectations for the Fed’s interest rate trajectory.