* Analyst sees gold’s decline as a kneejerk reaction by market
* Palladium erases gains after hitting 16-week high (Updates prices)
By Karthika Suresh Namboothiri
July 11 (Reuters) - Gold prices slumped 1% on Thursday, erasing gains posted earlier in the session after stronger-than-expected consumer inflation in the United States cast doubts whether the U.S. central bank will cut interest rates as aggressively as expected.
Spot gold shed 1% to $1,404.40 per ounce as of 1:30 p.m. EDT (1730 GMT), dropping nearly $15 after U.S. consumer prices demonstrated a pick-up in underlying inflation, increasing in June by the most in nearly 1-1/2 years.
U.S. gold futures settled 0.4% lower to $1,406.70 per ounce.
Gold prices had touched a one-week high of $1,426 earlier in the session.
The Federal Reserve last month downgraded its U.S. inflation projection for 2019 to 1.5% from the 1.8% projected in March.
However, this may probably not change expectations the U.S. central bank will cut interest rates this month.
“We saw today’s inflation data - the markets started to back off today because it challenges the need for additional rate cuts,” said Chris Gaffney, president of world markets at TIAA Bank, calling bullion’s decline a kneejerk reaction.
Thursday’s move “is just an adjustment of the fact that maybe it had gone up a little fast yesterday, but is still holding nicely above $1,400, and it looks like we going to continue holding above $1,400,” he added.
Spot gold rose 1.5% on Wednesday after Fed Chair Jerome Powell’s dovish remarks, where he confirmed the U.S. economy was still under threat from disappointing factory activity, tame inflation and a simmering trade war, and said the Fed stood ready to “act as appropriate.”
This statement weighed on the dollar. The U.S. currency against major other currencies was largely tepid for a second session.
Policymakers from the U.S. central bank are scheduled to meet on July 30-31, where investors will look for further cues on monetary policy easing.
Gold in June rallied to a six-year peak of $1,438.63 an ounce, largely on the back of expectations of rate cuts by key central banks amid concerns over the global economy.
“A break above $1,438 may lead to further buying orders with $1,500 being the next level traders looking to target,” Hussein Sayed, chief market strategist at FXTM, wrote in a research note.
Indicative of investor sentiment, holdings of SPDR Gold Trust, the world’s largest gold-backed exchange-traded fund, rose 0.8% on Wednesday.
Among other precious metals, palladium erased gains and dipped 1.7% to $1,561.86 per ounce, having earlier hit a high of $1,605.52.
Silver was down 0.9% to $15.10, while spot platinum dipped 0.8% to $818. (Reporting by Karthika Suresh Namboothiri in Bengaluru, editing by G Crosse)