USD/MXN plunges on risk-on sentiment, stays below 16.90 ahead of Mexican Inflation

• USD/MXN continues its losing streak that began on February 29.
• US Dollar struggles on risk-on sentiment amid lower US Treasury yields.
• Mexican Headline inflation is anticipated to decelerate in February.

USD/MXN faces downward pressure due to the subdued US Dollar (USD), which could be attributed to the risk-on sentiment amid subdued US Treasury yields. The pair inches lower to near 16.90 during the European session on Thursday, with lower US Dollar Index (DXY) trading lower around 103.30.

US Treasury yields faced challenges as Federal Reserve (Fed) Chair Jerome Powell commented on rate cuts possibility at some point in 2024 during his testimony before the House Financial Services Committee. However, Powell stated that it is not suitable to lower the target range until it has attained a higher level of assurance that inflation is consistently progressing towards the 2% target.

Weaker employment data from the United States contributed to the downward pressure on the US Dollar (USD), which in turn, acts as a headwind for the USD/MXN pair. February's US ADP Employment Change was reported at 140K, slightly below the anticipated 150K but an improvement from the previous 111K.

On the Mexican side, INEGI released Consumer Confidence for February, showing a slight decrease to 47.1 from 47.6. The seasonally adjusted also came lower at 47.0 from 47.1. Traders await February’s inflation data scheduled to be released on Thursday. Headline Inflation is expected to slow down, with an expected increase of 0.11%, compared to the previous rise of 0.89%.

Economists at CIBC Capital Markets anticipate that the USD/MXN pair will rise as the Bank of Mexico (Banxico) is poised to diverge from the Federal Reserve by implementing a rate cut this month. Given the lack of adjustments in the trajectory toward achieving the 3% inflation target and Banxico's indication of a potential rate cut in March, they maintain their projection for successive rate reductions beginning next month, with an overnight rate forecast of 9.25% by year-end.