USD/MXN improves to 17.08 as the Dollar advances due to market caution, focus on the US CPI

• USD/MXN breaks two-day losing streak ahead of US CPI data.
• Banxico maintains its forecast that inflation will reach its target of 3% in 2025.
• The expected moderation of inflation in the US increases the chances that the Fed will cut interest rates in March.
• The US annual CPI and core CPI are expected to decline to 2.9% and 3.7%, respectively.

USD/MXN breaks a two-day losing streak, boosted by strengthening US Dollar (USD), as traders act cautiously ahead of the release of US inflation data, scheduled for Tuesday during the North American session. The pair approached 17.08 during the European session on Tuesday.

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

In addition, the governor of Banxico, Victoria Rodríguez Ceja, expressed her expectation that inflation will resume its downward trajectory and continue with 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 in 2025.

The governor of Banxico also commented: “The inflationary environment has evolved and the current situation differs significantly from what we experienced in 2022, even in the first months of 2023.” She stated that the central bank would base its decisions on a number of factors and data, including actions taken by the US Federal Reserve.

The expected moderation of US inflation in January increases the likelihood that the Federal Reserve (Fed) will reconsider its stance on reducing interest rates at the next meeting in March. This expectation puts downward pressure on US Treasury yields, subsequently weighing on the US Dollar. Consequently, USD/MXN faces resistance.

The Dollar Index (DXY), which reflects the evolution of the USD against a basket of six major currencies, remains stable around 104.10. Meanwhile, the 2-year and 10-year US Treasury yields stand at 4.47% and 4.16%, respectively.