USD/MXN retraces its recent gains ahead of FOMC Minutes, trades lower around 17.05

USD/MXN retraces its recent gains and inches lower to near 17.05 during the European trading hours on Wednesday. However, the Mexican Peso (MXN) may face downward pressure as economists at ING suggest a possible 25 basis points (bps) rate cut in March, although the Bank of Mexico (Banxico) is expected to proceed cautiously in its rate-cutting cycle.

On Monday, Mexico's National Statistics Agency (INEGI) released the Indicator of Economic Activity (IOAE), indicating a 0.7% month-on-month contraction in the economy, despite a 1.3% year-on-year growth. Additionally, Retail Sales data for December is expected to be released on Wednesday.

The US Dollar Index (DXY) holds steady at around 104.10 after recovering intraday losses. The decline in the US Treasury yields pulls back the US Dollar (USD), which in turn, undermines the USD/MXN pair. The 2-year and 10-year yields on US Treasury coupons stand at 4.59% and 4.26%, respectively, at the time of writing.

The US Federal Reserve is expected to maintain elevated policy rates for an extended period to address persistent inflation concerns, particularly in light of last week's strong consumer and producer prices data from the United States (US).

The prospect of higher interest rates is likely to dampen economic activity in the United States (US), potentially impacting company profits. As a result, investors are turning toward the US bond market, causing prices of US Treasury coupons to rise and pulling yields downward.

Traders are eagerly awaiting the release of the Federal Open Market Committee (FOMC) Minutes later in the North American session to gain further insights into the Federal Reserve's interest rates trajectory.