USD/MXN stretches higher to 17.26 due to the market caution, US GDP Annualized eyed

• USD/MXN gains ground on market caution before the Fed’s interest rate decision.
• Traders adopt a cautious stance due to confusion regarding the Fed’s rate cuts in March.
• Mexico’s mid-month January inflation increased by 0.49% against the predicted 0.38%.

USD/MXN retraces its recent losses as the US Dollar (USD) maintains its position in the positive territory despite the downbeat US Treasury yields. The USD/MXN pair improves to 17.26 during the European session on Thursday. The market caution ahead of the interest rate decision by the US Federal Reserve (Fed) on January 31, gives rise to the demand of the Greenback.

The US Dollar Index trades around 103.30, accompanied by 2-year and 10-year yields on US bond coupons standing at 4.37% and 4.17%, respectively, at the time of writing. Market participants lean towards a sentiment favoring potential rate cuts by the Federal Reserve in the upcoming March meeting. Nevertheless, the recently released positive S&P Global Purchasing Managers Index (PMI) data from the United States could diminish the likelihood of Federal Reserve rate cuts in March.

Moreover, the CME FedWatch tool signals that the probability of a March rate cut by the Federal Reserve has fallen to below 40%, marking a significant decrease from the 80% probability recorded just a month ago. Additionally, traders are expected to closely monitor the release of the US Gross Domestic Product Annualized (Q4) data scheduled for Thursday.

On the other side, the Mexican Peso (MXN) gained ground against the US Dollar after the release of the 1st half-month inflation data from Mexico, which indicated a resurgence in inflation within the country. This potential reacceleration may dissuade the Bank of Mexico (Banxico) from considering a reduction in policy rates. Concurrently, core prices have shown a continued easing, suggesting a sustained disinflationary trend. Simultaneously, data from INEGI (Instituto Nacional de Estadística y Geografía) shows a contraction in Mexico's economic activity in November, surpassing the decline observed in October.

In mid-month January, Mexico's inflation increased by 0.49%, surpassing predictions of 0.38% but falling slightly below December's figure of 0.52%. Core inflation, meeting expectations, stood at 0.25%, reflecting a decrease compared to the 0.46% registered previously.

Moreover, the month-over-month Economic Activity in November contracted to -0.5%, exceeding the -0.1% contraction from October. On an annual basis, the figures dropped to 2.3% from the previous 4.4%. The Mexican economy is starting to reflect the impact of the elevated interest rates set by Banxico at 11.25%, even though the market projects that the economy will experience growth above 2.0% in 2024.