US July CPI +2.9% vs +3.0% y/y expected

Gold prices dropped 1% on Wednesday following data that showed U.S. consumer prices rebounded as expected in July, dampening hopes for a significant rate cut by the Federal Reserve next month.

Spot gold decreased by 1% to $2,440.47 per ounce by 1:45 p.m. EDT (1745 GMT), while U.S. gold futures ended 1.1% lower at $2,479.70.

"A September cut is almost certain; however, current data suggests the Fed might start with a 25 basis point reduction, which would disappoint the market that tends to anticipate more aggressive moves," said Tai Wong, an independent metals trader based in New York.

According to the Labor Department's Bureau of Labor Statistics, the U.S. consumer price index rose by 0.2% in July, following a 0.1% decline in June. Over the 12 months leading up to July, the CPI increased by 2.9%, compared to a 3% rise in June.

Markets now estimate a 36% chance of a 50-basis point rate cut by the Fed in September, down from 50% before the release of the U.S. CPI data, according to the CME FedWatch Tool.

Lower interest rates decrease the opportunity cost of holding non-yielding gold.

"Expectations have now shifted back to favor a 25 basis point cut, which could be reducing momentum in the gold market," said Phillip Streible, chief market strategist at Blue Line Futures.

Atlanta Fed President Raphael Bostic mentioned on Tuesday that he wanted to see "a little more data" before he would support a reduction in interest rates.