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

• The USD/MXN recovers the recent losses recorded the previous day.
• The Dollar appreciates despite the weakness of US Treasury yields.
• Banxico is expected to reduce the interest rate by 25 basis points at Thursday's meeting.

The USD/MXN pair recovers its recent losses and advances near 16.80 during the European session on Wednesday. The US Dollar (USD) gains ground, despite weakness in US Treasury yields, which in turn strengthens the USD/MXN pair.

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

The Federal Open Market Committee (FOMC) is expected to keep the federal funds rate between 5.25% and 5.50%. According to the CME's FedWatch tool, the probability of a rate cut in May stands at 6.3%, while the probability of rate cuts in June and July has increased to 59.2% and 76.0%, respectively.

In February, US building permits rose to 1,518,000, surpassing both the expected 1,495,000 and the previous 1,489,000. In addition, housing construction starts in the United States amounted to 1,521,000 million, exceeding market forecasts of 1,425,000 and marking a notable increase compared to the previous 1,374,000.

In the fourth quarter of 2023, Mexico's Private Spending recorded an increase of 5.1% year-on-year, up from 4.3% previously. However, the quarter-on-quarter report indicated an increase of 0.9%, slightly below the previous rebound of 1.2%. Mexican retail sales will be published on Wednesday.

In Banxico's quarterly report, officials acknowledged progress in controlling inflation and stressed the importance of avoiding premature interest rate cuts. Attention now turns to the Bank of Mexico's (Banxico) interest rate decision on Thursday, with expectations leaning towards a 25 basis point reduction.