USD/MXN depreciates toward 19.00 due to improved risk appetite

• USD/MXN could limit its downside amid rising US Treasury yields.
• The Mexican Peso may struggle as the Banxico may reduce borrowing costs at Thursday’s meeting.
• CME FedWatch tool suggests 67.5% odds of a 50-basis point Fed rate cut in September, up from 13.2% last week.

USD/MXN trades around 19.30 during the early European hours on Wednesday after breaking its four-day winning streak. The Mexican Peso (MXN) gains ground due to possible improved risk appetite. However, the downside of the USD/MXN pair could be limited as US Dollar (USD) advances amid rising Treasury yields.

Mexico’s Auto Exports fell by 1.6% year-on-year to 271,496 units in July, breaking a streak of twenty consecutive months of growth. This decline highlights the ongoing economic slowdown, which, along with lower inflation readings, might prompt the Bank of Mexico (Banxico) to consider lowering borrowing costs at its upcoming meeting. Traders will likely observe the inflation data before the policy decision on Thursday.

The US Dollar Index (DXY), which measures the value of the US Dollar against its six major peers, trades around 103.20 with 2-year and 10-year yields on US Treasury bonds standing at 4.00% and 3.90%, respectively, at the time of writing.

However, the upside of the USD/MXN could be retrained due to increasing odds of a relatively higher rate cut starting in September after the weaker US labor data for July raised the fear of a looming US recession. According to the CME FedWatch tool, there is now a 67.5% probability of a 50-basis point (bps) interest rate cut by the US Federal Reserve (Fed) in September, up from 13.2% a week earlier.

According to Reuters, Federal Reserve Bank of San Francisco President Mary Daly noted on Monday that “risks to the Fed's mandates are becoming more balanced and that there is openness to the possibility of cutting rates in upcoming meetings.” Additionally, Chicago Fed President Austan Goolsbee stated that the central bank is prepared to act if economic or financial conditions worsen.