USD/MXN stretches higher to near 17.22 as US bond yields improve

• USD/MXN gains ground on improved US Treasury yields.
• Mexican Peso could perform on factors associated with the United States.
• Fed members’ remarks indicated a more hawkish interest rate trajectory.

USD/MXN extends its gains and trades around 17.22 during the European trading hours on Tuesday. The US Dollar Index (DXY) trades lower near 103.10, while the 2-year and 10-year yields on US bond coupons trade at 4.40% and 4.12%, respectively, by the press time.

According to TD Securities analysis, the performance of the Mexican Peso (MXN) is notably influenced by factors associated with the United States (US). The market sentiment reflects the expectation that the Federal Reserve (Fed) will cut interest rates more than any other major central bank in 2024. However, the recent hawkish remarks, from Fed members indicate a shift in the Fed's stance towards a more hawkish trajectory for interest rates, providing support for the Greenback.

If the US Federal Reserve (Fed) adopts an aggressive cutting cycle in 2024, it could prompt markets to factor in more rate cuts by the Bank of Mexico (Banxico), potentially resulting in underperformance of the Mexican Peso. Market sentiment suggests that the upcoming 2024 elections in both Mexico and the US could exert additional pressure on the performance of the Mexican Peso.

The recent data on Mexico's Retail Sales indicates a slowdown in the growth of consumer spending. Looking ahead, the Banxico is set to release the 1st half-month Inflation data for January on Wednesday. Market expectations anticipate a reading of 0.38%, declining from the previous reading of 0.58%, with core inflation expected to report a figure of 0.28% against the previous reading of 0.46%. These indicators will be closely monitored for their potential impact on monetary policy and the performance of the Mexican Peso, which in turn, influences the USD/MXN pair.

On the US docket, the release of the Richmond Fed Manufacturing Index for January, scheduled for later in the North American session, will provide additional insights into the current state of the US economy.