USD/MXN maintains early gains amidst low liquidity, traders brace for Powell’s Congress appearance

• USD/MXN stays strong despite a slight retreat; lower European equities dampen market sentiment.
• Fed Chair Powell’s upcoming Congress testimony draws focus; chances for a July rate hike by the Fed are estimated at 73.2%.
• Bank of Mexico is likely to keep rates unchanged; inflation trends are set to influence future rate decisions.

USD/MXN clings to its earlier gains after hitting a daily high of 17.1717 and retreats below the 17.1000 figure due to thin liquidity conditions in the observance of the Juneteenth holiday. At the time of writing, the USD/MXN is trading at 17.0784, almost unchanged.

Investors are cautious about Powell’s address to Congress, as Fed hints at possible rate hikes and the Mexican Peso at the mercy of Banxico’s decision

European equities closed on a lower note portraying a risk-off mood. Therefore, the Mexican Peso (MXN), often viewed as a risk-sensitive currency, weakened, but it’s trimming its earlier losses.

During the week, traders would remain focused on the Federal Reserve (Fed) Chair Jerome Powell’s appearance at the US Congress on Wednesday and Thursday. Nevertheless, most market participants estimate he would not change his latest press conference tone after he and his colleagues held rates unchanged at 5.00%-5.25%.

However, Powell and Co. suggested the Fed still has ammunition for at least 50 bps rate hikes toward the year’s end, according to the Summary of Economic Projections (SEP) dot plots. More than half of the Fed members see rates above 5.50%, a hawkish posture that Jerome Powell weighed on the downside at the post-FOMC decision press conference.

Nevertheless, the CME FedWatch Tool suggests odds for a 25 bps increase at the July meeting at 73.2%. After that, futures do not expect an additional hike, as seen in the last week’s US equity markets, which rallied to new yearly highs.

The US Dollar Index, a measure of the buck’s value against a basket of peers, climbs 0.21%, at 102.515.

On the Mexican front, recent commentaries by the Bank of Mexico (Banxico) officials suggested the central bank is set to keep rates unchanged at the June 22 meeting. Banxico’s Governor, Victoria Rodriguez Ceja, said that rates would not be changed for at least a couple of sessions. However, in the last week, Deputy Governor Jonathan Heath suggested that three meetings would be unnecessary.

Ahead of Banxico¿s decision, inflation in Mexico for the first half of June would be revealed, expected to continue its downtrend and not to change the central bank’s decision after the report.

USD/MXN Key Technical Levels