USD/MXN falls to near 16.90 on risk appetite, focus on Fed Powell's testimony

• USD/MXN faces a challenge on improved risk sentiment on Wednesday.
• CME FedWatch Tool suggests a 4.0% chance of a 25 bps Fed rate cut in March.
• Banxico is expected to reduce interest rates in the March meeting as per a Reuters poll.

USD/MXN continues its losing streak that began on February 29, declining to near 16.90 during the European session on Wednesday. The decline in the US Dollar (USD) puts pressure on the USD/MXN pair, which could be attributed to the improved risk appetite.

Additionally, the softer-than-expected ISM Services Purchasing Managers Index (PMI) from the United States (US), contributed pressure for the Greenback. The ISM Services PMI decreased to 52.6 from 53.4 prior, falling short of the expected 53.0 in February. Additionally, Factory Orders (MoM) decreased by 3.6% in January, more than the expected 2.9%.

Market participants will likely monitor Federal Reserve (Fed) Chairman Jerome Powell's testimony before the US Congress' House Financial Services Committee on Wednesday. Market attention is also focused on the ADP Employment Change report for February. According to the CME FedWatch Tool, there is a 4.0% probability of a 25 basis points rate cut in March, while the likelihood of cuts in May and June stands at 23.9% and 53.3%, respectively.

On the Mexican side, as per a Reuters poll, 15 analysts estimate that inflation will slow down in February, reinforcing expectations that the Bank of Mexico (Banxico) could cut rates as soon as the March 21 meeting. Moreover, market expectations remain high for Banxico to implement monetary policy easing in March, with investors anticipating a reduction of 75 basis points (bps) over the next six months.

On Monday, the data showed that Gross fixed investment in Mexico grew 13.4% year-on-year in December 2023, decelerating from a 19.2% rise in the previous month. Consumer confidence data is scheduled for release on Wednesday, followed by inflation data on Thursday.