Gold prices edged higher on Tuesday, with investors looking forward to the Federal Reserve policy meeting as expectations grew that the U.S. central bank would slow its monetary policy tightening given the upheaval in the banking sector.

Spot gold was up 0.2% at $1,982.29 per ounce, as of 0546 GMT. U.S. gold futures ticked up 0.1% to $1,984.30.

According to the CME FedWatch tool, markets are pricing in a 26.9% chance that the Fed will stand pat at the end of its March 21-22 meeting, with a 73.1% chance of a 25-basis-point (bps) hike.

"Gold is trading around the $1,980 level and well within yesterday's range, which was clearly a game of two halves," said Matt Simpson, a senior market analyst at City Index.

"A pause (in rate hikes) could send gold back above $2,000 initially, but for it to hold onto those gains, we'd need to see a lower dot plot and dovish press conference ... they're more likely to hike by 25 bps and peddle a 'data dependent' angle."

Gold is considered a safe haven during times of financial uncertainty, and lower interest rates make non-yielding bullion more attractive by reducing the opportunity cost of holding it.

In volatile trading on Monday, gold prices initially fell by 1%, but reversed course to jump to their highest since March 2022 at $2,009.59, as investors digested the impact of measures taken by several central banks to contain a banking crisis and stabilise global financial markets.

UBS agreed to buy rival Credit Suisse on Sunday for $3.23 billion in a shotgun merger engineered by Swiss authorities, which stemmed selling in bank shares though the mood was fragile.

"Despite banking regulators rushing to shore up market confidence, the uncertain macro backdrop continues to entice buying (in gold)," analysts at ANZ said in a note.

Spot silver rose 0.2% to $22.57 per ounce, platinum edged down 0.2% to $986.53 and palladium was 0.2% higher at $1,417.54.