The Hebrew verb translated have set means literally “to pour out,” and some scholars see here the meaning of “anoint” (so New Jerusalem Bible, An American Translation); but most take it to mean establish firmly, that is, to install (New Jerusalem Bible); New English Bible has “I have enthroned.” Here the Septuagint has the king as the speaker: “I have been installed (as king) by him on Zion, his holy hill.”
My king is the king that God chose to rule his people (verse 2).
The name Zion was applied to the hill (Mount Moriah) on which Solomon built the Temple; by extension the name was applied to the Temple, to the city of Jerusalem, and sometimes to the whole land of Israel. The hill is called holy because it belongs exclusively to God.
Since Zion and Jerusalem are both used in the psalms with reference to the city of Jerusalem, there is some advantage in translating both terms as “Jerusalem,” particularly as most readers today know of the existence of a city by that name. However, since Zion and Jerusalem occur in a variety of contexts, it is advisable to keep both terms and provide a supplementary note in the glossary. It is also necessary to make sure in most contexts that Zion and Jerusalem are not two separate places. The expression my holy hill should not be translated so that it means “my tabooed mountain,” but rather that it is dedicated to God; for example, “the hill which is given to God” or, in languages which do not have a passive voice, “… which people have dedicated (or, set apart as sacred) to me.” In this passage it is possible to indicate the relation of God to the hill as one of “belonging”; for example, “On Zion, my own hill.” The expression my king may present a problem in that in ordinary usage it is spoken by one of the king’s subjects with the meaning “the king who rules me.” In the present context the meaning is “the king God has chosen.” The full expression may then be rendered “ ‘On Zion, my hill,’ says God, ‘I have placed the king I have chosen.’ ”
Quoted with permission from Bratcher, Robert G. and Reyburn, William D. A Handbook on the Book of Psalms. (UBS Helps for Translators). New York: UBS, 1991. For this and other handbooks for translators see here .