USD/MXN extends gains to near 16.99 on risk-off mood despite upbeat Mexico inflation data

• USD/MXN gains ground as risk-on sentiment shifts to risk aversion.
• Upbeat Mexico’s inflation data could refrain Banxico from easing monetary policy in February’s meeting.
• Traders await US CPI data to gain more cues on the Fed’s interest rate trajectory.

USD/MXN continues to gain ground, advancing further near 16.99 during the European session on Wednesday. The USD/MXN pair received upward support from the risk-off market sentiment. However, the upward trend in Mexico's consumer inflation might influence the Bank of Mexico (Banxico) to adopt a measured approach to easing monetary policy in the upcoming period. This is expected to provide support for the Mexican Peso (MXN) in the foreseeable future.

Mexico's 12-month inflation for December climbed to 4.66%, up from the previous 4.32%. Headline inflation increased to 0.71%, contrary to the anticipated contraction of 0.61% and the prior reading of 0.64%. Core inflation stood at 0.44%, slightly below the expected 0.50%. Traders are likely to keep an eye on Thursday's Industrial Output data, with expectations of a slowdown in the production of Mexican industries.

The US Dollar Index (DXY) holds steady around 102.50 after recent gains, attempting to build on its profits amid uncertain movements in US Treasury yields. As of now, the 2-year and 10-year yields on US bond coupons stand at 4.34% and 4.0%, respectively. The Greenback might find support if the prevailing risk aversion sentiment continues to improve, especially with December's Consumer Price Index (CPI) data from the United States set to be released on Thursday.

Investors are keenly awaiting signals from the Federal Reserve regarding the interest rate trajectory. While higher interest rates could potentially impact aggregate demand, leading to subdued growth and a softer labor market, the Fed is anticipated to refrain from implementing any rate cuts in its upcoming January policy meeting.