USD/MXN fades bounce off September 2017 levels ahead of Mexican inflation

• USD/MXN retreats towards multi-year low as US Dollar struggles to cheer risk-off mood.
• US Dollar grinds despite President Biden’s controversial tax proposal, higher yields and hawkish Fed bets.
• Banxico shows more clarity over rate hike than Fed with no talks of policy pivot fueling Mexican Peso.

USD/MXN eases to 17.96 during early Thursday, after a failed attempt to recover from the lowest levels since September 2017, tested the previous day. The quote’s latest weakness pays little to the risk-off mood while bracing for the key Mexican inflation data.

Market sentiment sours as US President Joe Biden’s proposal for higher taxes appears an extra economic burden amid the looming recession woes. That said, Biden proposes raising corporation tax from 21% to 28% in his latest budget guide ahead of Friday’s release. The US Leader also aims for a 25% billionaire tax and large levies on rich investors.

Additionally, disappointment from China’s inflation data also dims the prospects of recovery in the world’s second-largest economy and weighs on the risk profile and should have favored the US Dollar’s haven demand.

On the same line Fed Chairman Powell repeated his hawkish calls of readiness to lift the rate while highlighting stronger-than-expected inflation pressure. The same bolstered bets for the Fed’s 50 bps rate hike but the Testimony 2.0 didn’t have anything new from what’s already heard on Tuesday and hence the US Dollar traders were mostly afraid of taking any major steps.

Alternatively, Banxico appears more clear in its hawkish monetary policy bias and has already signaled a further rate hike in its latest monetary policy meeting where the Mexican central bank lifted the benchmark rate by 50 bps.

Against this backdrop, S&P 500 Futures reverses the previous day’s bounce off a one-week low while refreshing the intraday bottom around 3,985. On the same line, the US 10-year Treasury bond yields rise to 3.99%, up one basis point (bp), whereas the two-year counterpart pares intraday losses near 5.05% at the latest. It’s worth noting that US yield curve inversion widened to the highest levels since 1981 and propelled the recession fears the previous day.

Although the bears are in the driver’s seat, the USD/MXN pair’s further moves rely on the Mexican Inflation data for February. That said, downbeat forecasts for the Headline Inflation, Core Inflation and 12-month Inflation, join the recent challenge to sentiment to prod the bears.

Technical analysis

A daily closing below April 2018 lows surrounding 17.93 becomes necessary for the bears to keep the reins. That said, the oversold RSI (14) challenges USD/MXN pair’s further downside.