USD/MXN rises to 16.80 on hawkish sentiment surrounding FOMC monetary tightening

• USD/MXN recovers its recent losses recorded in the previous session.
• US Dollar appreciates despite weaker US Treasury yields.
• Banxico is expected to reduce the interest rate by 25 bps at Thursday’s meeting.

USD/MXN retraces its recent losses and moves higher to near 16.80 during Wednesday's European trading hours. The US Dollar (USD) gains ground, despite weaker US Treasury yields, which in turn, bolsters the USD/MXN pair.

The US Dollar Index (DXY) rises to near 104.00, with 2-year and 10-year yields on US Treasury bonds standing lower at 4.67% and 4.27%, at the time of writing. Investors are eagerly awaiting the interest rate decision from the US Federal Reserve (Fed) scheduled for Wednesday.

The Federal Open Market Committee (FOMC) is widely expected to maintain its key federal funds interest rate within a range of 5.25% to 5.50%. According to the CME FedWatch Tool, the probability of a rate cut in May stands at 6.3%, while the likelihood of rate cuts in June and July has increased to 59.2% and 76.0%, respectively.

In February, US Building Permits (Month-on-Month) surged to 1.518 million, surpassing both the anticipated 1.495 million and the previous 1.489 million. Additionally, US Housing Starts (Month-on-Month) climbed to 1.521 million, exceeding market forecasts of 1.425 million and marking a notable increase from the preceding 1.374 million.

In the fourth quarter of 2023, Private Spending (Year-over-Year) on the Mexican side witnessed a 5.1% increase, up from the previous 4.3% rise. However, the quarter-over-quarter report indicated a 0.9% increase, slightly below the previous 1.2% uptick. Market focus will shift to Retail Sales figures from Mexico, scheduled for Wednesday.

In Banxico's quarterly report, officials acknowledged strides in inflation control and emphasized the importance of avoiding premature interest rate cuts. The spotlight now turns to the Bank of Mexico's (Banxico) interest rate decision on Thursday, with expectations leaning towards a 25 basis points reduction.