Gold slid over 1% on Monday as fears of a closure of the Strait of Hormuz drove oil prices sharply higher, reviving expectations of elevated interest rates to combat inflationary pressures from escalating ​hostilities in the Middle East.

Spot gold dropped 1.5% to $4,059.11 per ounce by 0356 ​GMT. U.S. gold futures for August delivery were down 1.1% at $4,067.10.

U.S. and ⁠Iranian forces have exchanged heavy missile and drone assaults, with Tehran targeting U.S. facilities in ​states across the Gulf on Sunday and saying it had again closed the vital Strait ​of Hormuz.

Oil prices jumped about 4%, the dollar and U.S. Treasury yields climbed, and share markets slipped in Asia.

"Any breakout of violence in the Gulf is accompanied by pressure on gold," said Nicholas ​Frappell, global head of institutional markets at ABC Refinery.
"The question is, if the Strait ​of Hormuz remains effectively or partially closed, does that lead to a deflationary effect, further down the ‌road, ⁠that might actually be supportive for gold if you have demand destruction leading to lower economic activity," Frappell added.

Kevin Warsh's first semiannual testimony before Congress as Federal Reserve chair, along with a slate of key U.S. economic data, including June CPI, PPI and retail ​sales, will be closely ​watched this week for ⁠fresh clues on the economy, inflation and the monetary policy outlook.

Remarks from Fed policymakers, including Vice Chair Michelle Bowman and Governor Christopher ​Waller, later in the day are also in focus as they ​could provide ⁠insights on how inflationary pressures are affecting the central bank's stance on interest rate hikes.

Traders are currently pricing in a 72% chance of a U.S. Fed interest rate hike in ⁠September, up ​from about 63% last week, according to the CME ​FedWatch Tool.

Courtesy: Reuters