Spot gold slipped 0.3 percent to $1,268.00 an ounce by 0623 GMT, after ending flat in the previous session. The metal hit a three-week high of $1,284.85 on Monday due to violence in Iraq, but prices have since fallen back.
The Fed is widely expected to chop another $10 billion from its monthly bond purchases at its two-day policy meet that concludes on Wednesday.
Markets will be watching closely for any commentary on when the U.S. central bank would begin to raise interest rates and its outlook for the economy, especially given that recent data has been strong.
"We remain cautious about gold going into the Fed meeting on Wednesday as hints of rate rises could trigger more dollar strengthening and prove to be an overall drag on the precious metals group," said Edward Meir, analyst at INTL FCStone.
"Geopolitical headlines still have the capability to spark prices higher, but for the moment, we think Fed uncertainties will dominate," Meir said.
The U.S. dollar climbed in tandem with rising Treasury yields on Wednesday as a surprisingly high reading for U.S. inflation threatened to give a hawkish tilt to the Fed's policy outlook later in the session.
Investor sentiment in bullion is bearish as reflected in flows in SPDR Gold Trust, the world's largest gold-backed exchange-traded fund. Holdings in the fund fell 0.26 tonnes to 782.62 tonnes on Tuesday - a second straight day of declines.
The fund, considered a proxy for investor sentiment, posted its biggest outflow since mid-April on Monday.
Physical markets in Asia have also not been able to boost prices.
In top buyer China, gold prices were trading either at a discount of about $1 an ounce or on par with the global benchmark, in a sign that buying interest is weak.
Gold premiums in India - the world's second-biggest gold buyer - fell to their lowest in four months as wedding demand cooled off.
Platinum and palladium edged higher as South Africa's platinum producers and union AMCU agreed on a broad wage offer to end a protracted strike. Details such as the time frame and additional benefits are still outstanding, a producer said on Tuesday.