Gold (XAU/USD) attracted sellers during the first half of Wednesday's European session after failing to consolidate above the $4,100 level the previous day. Nevertheless, bulls continue to defend their positions. Despite weaker-than-expected U.S. Consumer Price Index (CPI) data, market participants remain focused on inflation risks associated with rising energy prices. Escalating tensions between the United States and Iran, along with the closure of the Strait of Hormuz, continue to support oil prices.

Additional pressure comes from comments by Federal Reserve Chairman Kevin Warsh, who, during his first testimony before Congress, reaffirmed the Fed's commitment to maintaining price stability. This keeps the possibility of at least one interest rate hike before the end of the year on the table, which is negative for gold. At the same time, the weaker U.S. dollar has allowed the precious metal to remain above the psychologically important $4,000 level.

According to the U.S. Bureau of Labor Statistics, headline CPI fell by 0.4% in June, marking the largest monthly decline since April 2020 and significantly exceeding expectations for a 0.1% decline. Core CPI, which excludes food and energy prices, was unchanged, compared with forecasts for a 0.3% increase. On an annual basis, headline and core inflation slowed to 3.5% and 2.6%, respectively, both falling short of consensus estimates. These figures prompted markets to reassess expectations for further Federal Reserve policy tightening, pushing the U.S. dollar to its lowest level in nearly four weeks.

However, the initial market reaction proved short-lived. During his congressional testimony, Kevin Warsh emphasized that the Federal Reserve would not allow inflation to remain persistently high while also highlighting the resilience of the U.S. economy. In addition, rising oil prices continue to increase inflationary pressures, strengthening the case for further monetary policy tightening. According to the CME Group FedWatch Tool, markets are currently pricing in a rate hike either in September or December.Meanwhile, persistent geopolitical tensions in the Middle East continue to discourage investors from opening aggressive short positions in the U.S. dollar, given its status as a safe-haven asset. Reports indicate that the United States has resumed airstrikes against targets in Iran, prompting retaliatory attacks on U.S. military facilities in the Persian Gulf region. Additional uncertainty followed comments by U.S. President Donald Trump, who stated that he was prepared to strike Iranian infrastructure, including bridges and power plants, should Tehran refuse to return to negotiations. Taken together, these fundamental factors continue to support the U.S. dollar and suggest that further downside in gold remains the baseline scenario.

Today, traders should closely monitor the release of the U.S. Producer Price Index (PPI), as well as the second day of Federal Reserve Chairman Kevin Warsh's congressional testimony, both of which could shape the U.S. dollar's next move. At the same time, developments in the Middle East are likely to remain a key source of elevated volatility, creating short-term trading opportunities in the precious metals market.

From a technical perspective, XAU/USD remains within a descending parallel channel and continues to trade well below the 200-day Simple Moving Average (SMA), limiting the potential for further gains despite the recent rebound. Oscillators remain in negative territory, confirming that bears continue to hold the upper hand.

A sustained move above the psychologically important $4,200 level would give bulls an opportunity to weaken the prevailing bearish trend. Conversely, a break below June's low would likely accelerate the decline in gold prices.