* Rate expectations may continue to see huge swings - analyst
* Palladium up 0.4%
June 6 (Reuters) - Gold prices traded in a narrow range on Tuesday as investors sought more clarity around the U.S. Federal Reserve's policy outlook, while a softer dollar kept a floor under prices.
Spot gold held steady at $1,960.39 per ounce by 0639 GMT, while U.S. gold futures rose 0.1% to $1,976.10.
The dollar index eased 0.2%, making bullion less expensive for investors holding other currencies.
"The Fed's data-dependent stance will mean that rate expectations may continue to see huge swings due to its higher sensitivity to incoming economic data, with a key look-ahead being the U.S. May CPI report next week," IG market analyst Yeap Jun Rong said.
A survey from the Institute for Supply Management showed the U.S. services sector barely grew in May as new orders slowed, pushing a measure of prices paid by businesses for inputs to a three-year low, which could aid the Fed's fight against inflation.
Lower interest rates tend to lift gold as it reduces the opportunity cost of holding the non-yielding asset.
"(But) the constantly-shifting narrative around how high the terminal rate will have to be and the timeline for rate cuts could challenge gold prices' upside for now, until greater clarity is being presented on that front," Jun Rong said.
Traders have priced in a 74.2% chance that the Fed will hold interest rates at its June 13-14 policy meeting, according to CME Group's FedWatch tool.
Reuters technical analyst Wang Tao said spot gold may retest a support at $1,938 per ounce, as the bounce triggered by this level seems to be ending around a resistance at $1,964.
Spot silver fell 0.1% to $23.556 per ounce, platinum was flat at $1,029.88. Palladium rose 0.4% to $1,418.9.
Sentiment among gold investors in the short term is negative, said Michael Langford, director at corporate advisory firm AirGuide. (Reporting by Arundhati Sarkar in Bengaluru; Editing by Rashmi Aich and Sherry Jacob-Phillips)
