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Spot gold prices edge higher as eurozone inflation cools, ECB explores further rate hikes

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(Kitco News) - The gold market remains on firm footing against the euro even as European consumer inflation continues to cool and interest rates are expected to increase.

Thursday, Eurostats said preliminary consumer inflation in the last 12 months rose 6.1% in May, down from 7.0% in April. Headline inflation was cooler than expected, as economists were looking for an increase of 6.3%.

Core inflation for the year, which strips out volatile food and energy prices, also dropped more than expected, rising 5.3%, down from April's reading of 5.6%. According to consensus estimates, economists were looking for inflation to rise 5.5%.

Europe's latest inflation data did not have much impact on spot gold as prices continue to hold support above €1,839.55 an ounce, up 0.18. However, gold against the euro is underperforming the broader market. gold against the U.S. dollar is holding on to solid gains, last trading at $1,973.46 an ounce, up 0.55% on the day.

According to some analysts, gold could still struggle against the euro as real interest rates in the region are expected to head lower. While inflation pressures look to fall further, the European Central Bank is expected to continue raising interest rates through the summer.

Following the inflation data, ECB President Christine Lagarde said that the central bank still has work to do to bring inflation back to the 2% target.

"Today, inflation is too high and it is set to remain so for too long," she said at a conference in Hanover Germany. "There is no clear evidence that underlying inflation has peaked. To date, all measures monitored by the ECB are still strong. And whether they remain so will depend mainly on the balance between two forces: energy prices and wages."

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Lagarde added that in the current environment, she couldn't say how high interest rates will go.

"We will keep moving forward – determined and undeterred – until we see inflation returning to our 2% medium-term target in a timely manner," she said.

Analysts at Capital Economics said that they see the ECB raising interest rates two more times this year.

"While further gradual declines in the core rate seem likely, we don't think that will stop the ECB from raising interest rates in June and probably July," the analysts said.

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