USD/MXN moves sideways amid a risk-off sentiment, clings to near 16.70

• USD/MXN consolidates as risk aversion prevails ahead of policy decisions by the US Fed.
• The correction in US Treasury yields could weaken the US Dollar.
• Banxico is expected to reduce the 25 bps interest rate on Thursday.

USD/MXN hovers around 16.70 during the European session on Monday, marking gains for the third consecutive day. The US Dollar (USD) benefited from market caution ahead of the US Federal Reserve's interest rate decision on Wednesday.

However, the US Dollar faces downward pressure due to a correction in US Treasury yields. The US Dollar Index (DXY) hovers around 103.40, while the 2-year and 10-year US Treasury yields stand at 4.71% and 4.29%, respectively. Despite this, yields have risen recently due to a hawkish sentiment surrounding the Federal Reserve, which is expected to maintain its elevated interest rates in response to recent inflationary pressures.

In economic news, the preliminary US Michigan Consumer Sentiment Index for March declined to 76.5 from the previous reading of 76.9, contrary to expectations of remaining steady. However, Industrial Production (MoM) in February edged up by 0.1%, surpassing the anticipated flat reading of 0.0% and recovering from the previous month's decline of 0.5%.

On the other side, Mexico's Industrial Production surged by 2.9% over twelve months, surpassing December's stagnant performance. This could bolster the hawkish stance of the Bank of Mexico (Banxico).

In Banxico's quarterly report, officials acknowledged progress in inflation control and emphasized the importance of avoiding premature interest rate cuts. Governor Victoria Rodriguez Ceja has advocated for a gradual approach to adjustments, while Deputy Governor Jonathan Heath has cautioned against the risks associated with premature rate cuts.

Traders will eagerly await the release of Private Spending Retail Sales and Inflation data during the week. Furthermore, Banxico's interest rate decision is scheduled to be released on Thursday.