Gold prices traded in a narrow range on Wednesday as some investors stayed on the sidelines ahead of the U.S. Federal Reserve's interest rate decision and policy outlook.

Spot gold was flat at $1,940.11 per ounce, as of 0540 GMT, after dropping 2% on Tuesday. U.S. gold futures edged 0.1% higher at $1,942.10.

"Market developments remain fluid but as it stands, it does appear that banking sector wounds are showing tentative signs of recovery after the emergency backstops and assurances from authorities ... gold has eased lower as safe-haven demand dissipates," said OCBC FX strategist Christopher Wong.

Bullion recently rallied as much as 10%, or by about $180, to a one-year high on safe-haven demand after the collapse of U.S.-based Silicon Valley Bank and a crisis at lender Credit Suisse. But prices retreated after the rescue of Credit Suisse whetted risk appetite, although financial system uncertainties remained.

U.S. Treasury Secretary Janet Yellen told bankers on Tuesday the U.S. banking system was stabilizing, but further steps might be needed "if smaller institutions suffer deposit runs that pose the risk of contagion".

Investor attention is now on the Fed's decision scheduled at 1800 GMT, followed by a press conference by Fed Chair Jerome Powell. The U.S. central bank is widely expected to increase rates by 25 basis points, according to the CME FedWatch tool.

"If we do get higher dots plot, then that represents a still-hawkish Fed that is determined to fight inflation... a potential hawkish repricing could undermine gold prices," OCBC's Wong said.

Bullion is seen as a hedge against inflation, but the opportunity cost of holding non-yielding gold rises when interest rates are increased to bring down inflation.

"Gold may bounce into a range of $1,951 to $1,958 per ounce, as it has stabilized around a support at $1,934," Reuters technical analyst Wang Tao said.

Spot silver eased 0.1% to $22.36 per ounce, while platinum rose 0.5% to $973.30 and palladium gained 1.6% to $1,410.76.

(Reporting by Kavya Guduru in Bengaluru; Editing by Rashmi Aich and Sherry Jacob-Phillips)