Spot gold edged 0.1% lower to $2,033.88 per ounce by 0513 GMT, after touching a two-week high of $2048.12 in the previous session. Prices have dropped 1.4% so far this month.
U.S. gold futures rose 0.1% to $2,033.30.
"Gold's seasonal rally seemed to have arrived early, so it's not too much of a surprise to see it struggle this January ... traders are slowly coming around to a less-dovish Fed than they had hoped for in December," said Matt Simpson, a senior analyst at City Index.
Traders are pricing in about 130 basis points (bps) of Fed rate cuts for 2024, down from bets of more than 160 bps at the end of 2023, according to LSEG's interest rate probability app IRPR.
The chances of a March rate cut have dropped to 44% from about 90% a month ago.
The dollar index was on track to mark its best month since September, with an over 2% gain so far in January.
Yields on benchmark U.S. Treasury notes were at a two-week low of 4.0165%, but still higher than the year-end close of 3.8600%.
"With renewed hopes of a truce in Gaza, today's FOMC meeting runs the risk of disappointing doves and weighing on gold," said Simpson.
Market focus is on the Fed's statement at the end of its two-day policy meeting at 1900 GMT, where it is expected to leave rates unchanged, which is followed by a news conference by Chair Jerome Powell at 1930 GMT.
Spot silver dropped 0.5% to $23.05 per ounce, platinum slipped 0.2% to $918.79, and palladium rose 0.2% to $977.67. All three were poised for a monthly decline.
(Reporting by Harshit Verma in Bengaluru; Editing by Sherry Jacob-Phillips and Sohini Goswami)
By Harshit Verma
