USD/MXN continues to lose ground near 18.1250, awaits US PMI data

• USD/MXN extends losses for a third day on the downbeat US Dollar.
• Banxico Deputy Governor Mejia mentioned that the current monetary policy is effective in managing inflation.
• China's plans to issue additional sovereign debt appear to be influencing market sentiment positively.

USD/MXN follows the downward trajectory, trading lower near 18.1250 during the European session on Tuesday. The pair encounters hurdles stemming from a correction in the US Dollar (USD) along with a prevailing risk-on sentiment in the market.

The Mexican Peso (MXN) faced pressure as a result of disappointing retail sales in Mexico. The sharp 0.4% month-on-month decline in August, falling below the expected 0.0%, and the annual growth of 3.2%, which was lower than the forecasted 4.4% and July's 5.1%, are contributing factors.

In the previous week, Deputy Governor Omar Mejia of the Bank of Mexico (Banxico) maintained that the balance of inflation risks hasn't worsened. He highlighted the effectiveness of the current restrictive monetary policy in managing inflation and anticipates it aligning with Banxico's target by the second quarter of 2025.

Investors feel unsettled due to the possibility of an escalation in the Middle East, which could lead to disruptions in the region. Within Israel, there is a demand to reconsider the expected scope of a ground invasion of Gaza in the near future. However, diplomatic efforts are underway to ease tensions in the Israel-Hamas Gaza Strip.

China's announcement of plans to issue slightly over 1 trillion yuan in additional sovereign debt appears to be influencing market sentiment positively. Furthermore, the constructive dialogues between the US and China during their initial economic working group meeting reinforced this optimistic outlook. Consequently, the safe-haven US Dollar is experiencing downward pressure, impacting the USD/MXN pair.

The US Dollar Index (DXY) struggles to halt the losing streak, hovering around 105.70. After peaking at 5.02%, the 10-year Treasury yield swiftly reversed course, dropping to 4.81% in the latest update.

Investors await the US S&P Global PMI on Tuesday, followed by close attention to Q3 Gross Domestic Product (GDP) figures on Thursday. Additionally, Mexico’s Trade Balance data is set to be released on Friday.