USD/MXN faces a challenge ahead of US CPI, trades lower around 17.35

• USD/MXN trades lower as the Greenback fails to hold gains.
• US Dollar declines as traders adopt caution before US CPI release.
• Mexican President Andres Manuel Lopez Obrador mentioned that more needs to be done to curb inflation.

USD/MXN retraces its recent gains, trading lower near 17.35 during the European session on Tuesday. Investors appear to be exercising caution in buying the US Dollar (USD) ahead of the release of US Consumer Price Index (CPI) data later in the North American session. The market is pricing in expectations of a decline in US inflation, with the anticipation that it will ease to 3.1% from the previous 3.2%.

US Dollar Index (DXY) trades lower near 103.90 at the time of writing. However, the solid labor data from the previous week bolstered the Greenback as robust economic conditions in the United States (US) sparked discussions on how long the Federal Reserve (Fed) will maintain higher interest rates. Fed is expected to make no adjustments to the policy rate in its December meeting but the market is pricing in a 25 basis points (bps) rate cut by March 2024.

The Bank of Mexico's (Banxico) officials have recently expressed a leaning towards easing monetary policy, with discussions expected to begin in the first quarter of 2024. However, Deputy Governor Irene Espinosa has pushed back, emphasizing that inflationary risks persist and are increasing. Additionally, Mexican President Andres Manuel Lopez Obrador recently expressed the view that more needs to be done to bring inflation down. He emphasized that the Banxico should also focus on economic growth.

The upcoming announcement of Banxico's key interest rate on Thursday is a notable event that could influence market movements. The prevailing expectation is that Banxico will maintain cash rates at the unchanged level of 11.25%. Furthermore, Mexico’s Industrial Output data will be eyed on Tuesday.