USD/MXN drops despite hawkish remarks from Fed Powell; Banxico decision in focus

• Mexican Peso (MXN) advances against the US Dollar (USD) despite hawkish comments from Federal Reserve Chair Jerome Powell.
• Market participants expect Banxico to hold rates in the upcoming meeting, following more than 700 bps rate hikes as inflation cools.
• Fed Chair Powell’s testimony suggests at least two more rate hikes of 25 bps, though market participants anticipate only one.

The Mexican Peso (MXN) recovered territory vs. the US Dollar(USD) despite hawkish comments by the Federal Reserve (Fed) Chair Jerome Powell in its first-day appearance before the US Congress. The emerging market currency advanced, underpinned by high oil prices, while market participants looked towards the Bank of Mexico (Banxico) monetary policy decision on Thursday. The USD/MXN is trading at 17.0990, down 0.08%.

Mexican Peso rally in the hands of Banxico, with sellers eyeing the 16.00 handle

Wall Street finished with losses, as Jerome Powell delivered some hawkish remarks, emphasizing the US central bank would hike 25 bps at least two more times as he answered US House Representatives’ questions. Even though Fed members upward revised peak rates toward 5.6%, traders foresee just one 25 bps rate increase in July, as shown by the CME Fed WatchTool, with odds at 72%.

Meanwhile, Fed officials’ opinions began to diverge. Chicago and Atlanta Fed Presidents Goolsbee and Bostic adopted a dovish stance, with the former suggesting the US central bank is in wait-and-see mode, contrary to last Friday’s opinions, opening with Waller and Barkin, welcoming additional tightening.

The USD/MXN extended its losses as the greenback trended lower. The US Dollar Index, which measures the buck’s value against a basket of currencies, stumbles 0.44%, down at 102.088.

On Thursday,  Banxico is expected to hold rates for the second meeting in a row after raising rates by more than 700 bps as inflation cools down, as shown by the latest inflation report, with CPI expanding at 5.84%, below analysts’ estimates of 5.90%.

Comments made by Banxico’s officials suggested the central bank will keep rates unchanged, remaining higher for longer. But the first rate cut is expected towards the fourth quarter, as said by Goldman Sachs analysts.

USD/MXN Price Analysis: Technical outlook

The USD/MXN remains downward biased, with Tuesday’s gains being cut at half by Wednesday’s losses. The strength of the downtrend makes it challenging to project the USD/MXN pair direction. If Banxico keeps rates unchanged with a neutral tone, the USD/MXN could aim toward the 20-day Exponential Moving Average (EMA) at 17.3148, but overall positioning suggests a continuation of the downtrend. A rate hike would see the USD/MXN breaking support at 17.0000 and the pair diving toward October 2015 low of 16.3267.