USD/MXN improves to 17.08 as US Dollar rises on market caution, US CPI eyed

• USD/MXN snaps its two-day losing streak before US CPI data.
• Banxico maintains its outlook that inflation will reach its 3% target by 2025.
• The expected moderation in US inflation adds to the chance for Fed rate cuts in March.
• Annual US CPI and Core CPI are expected to decrease at 2.9% and 3.7%, respectively.

USD/MXN breaks its two-day losing streak, bolstered by a stronger US Dollar (USD) as traders exercise caution ahead of the release of US inflation data scheduled for Tuesday during the North American session. The USD/MXN pair inches higher to near 17.08 during the European session on Tuesday.

However, the Mexican Peso (MXN) may have found support as the Bank of Mexico (Banxico) adjusted its inflation projections upward for the first three quarters of 2024. They anticipate inflation to converge toward 3.5% in the fourth quarter, according to the latest monetary policy statement.

Furthermore, Banxico’s Governor, Victoria Rodriguez Ceja, expressed expectations that inflation would resume its downward trajectory and continue the disinflationary trend. She emphasized that despite recent increases over the past three months, Banxico maintains its outlook that inflation will reach its 3% target by 2025.

Governor Ceja also remarked, “The inflationary environment has evolved, and the current situation differs significantly from what we experienced in 2022, even in the initial months of 2023.” She affirmed that the central bank would base its decisions on a range of factors and data, including actions taken by the US Federal Reserve.

The anticipated moderation in US inflation for January adds to the likelihood that the Federal Reserve (Fed) may reconsider its stance on interest rate reductions at the upcoming March meeting. This expectation exerts downward pressure on yields of US Treasury bonds, subsequently weighing on the US Dollar. Consequently, the USD/MXN pair faces resistance.

The US Dollar Index (DXY), reflecting the USD's performance against a basket of six major currencies, remains steady at around 104.10. Meanwhile, the 2-year and 10-year US Treasury yields stand at 4.47% and 4.16%, respectively, by the press time.