Gold Bounces Amid Middle East Tensions, but Risks Remain Elevated

Gold prices are attempting to recover from their three-day decline on Wednesday, but buyers remain cautious amid escalating tensions in the Middle East. The precious metal has been trading near $4,350 after bouncing off one-week lows, but its upward momentum is limited by the ongoing conflict.

The US Dollar (USD) is struggling near two-week lows due to resurgent demand for the Japanese Yen (JPY), which is bolstered by continued bets surrounding the Bank of Japan's (BoJ) aggressive tightening cycle. However, the downside in the USD could be limited by the widening conflict in the Middle East, which keeps Oil prices elevated and inflation concerns alive.

China's Consumer Price Index (CPI) rose 0.8% year-over-year (YoY) in August, accelerating from 0.5% in July, while the Producer Price Index increased 3.8%, exceeding the forecast for a 3.6% gain and outpacing July's 3.5%. This has raised expectations for more than one Federal Reserve (Fed) interest rate hike this year.

TD Securities expects core inflation to see some relief in Q3, but notes that both core and headline CPI will likely resume their upward momentum in Q4, depending on the resolution of the Middle East conflict. As a result, gold remains exposed to two-way risks, with a sell-the-bounce trading strategy likely, particularly after China's hotter-than-expected inflation data.