USD/MXN moves sideways around 17.04 ahead of Mexico data, US Dollar remains subdued

• USD/MXN recovers intraday losses to move in the positive direction.
• CME FedWatch Tool indicates a 52.2% probability of a 25 bps rate reduction in June.
• Mexican Retail Sales MoM and YoY declined by 0.9 and 0.2%, respectively in December.

USD/MXN attempts to move in a positive direction after reclaiming intraday losses, maintaining a position near 17.04 during the European session on Thursday. However, the weakening US Dollar (USD) undermines the USD/MXN pair. The Federal Open Market Committee (FOMC) Minutes expressed policymakers' caution regarding the interest rates trajectory, indicating that policy easing will not begin in the upcoming monetary meetings.

The US Dollar Index (DXY) dips to 103.70, while the yields on 2-year and 10-year US bonds stand at 4.67% and 4.30%, respectively, at the time of writing. Market participants have largely dismissed expectations for interest rate cuts in March and May, but speculation persists that the first cut may occur in June. According to the CME FedWatch Tool, there is a 52.2% probability of a 25 basis points (bps) rate reduction in June.

This outlook may be influenced by higher Consumer Price Index (CPI) and Producer Price Index (PPI) figures from January. Investors are eagerly awaiting S&P US PMI data, weekly Initial Jobless Claims, and Existing Home Sales figures on Thursday for further insights into the United States’ economic landscape.

On the Mexican front, Retail Sales in Mexico (YoY) experienced a decline of 0.2% in December, contrary to market expectations of a 2.5% increase and the previous growth of 2.7%. Additionally, Retail Sales month-over-month fell by 0.9%, diverging from the expected increase to 0.2% from the prior 0.1%.

The Mexican Peso (MXN) may encounter downward pressure as market sentiment leans towards a potential 25 basis points (bps) rate cut in March. However, the Bank of Mexico (Banxico) is anticipated to carefully assess economic data before proceeding with its monetary policy easing cycle.

On Monday, Mexico's National Statistics Agency (INEGI) reported a 0.7% month-over-month contraction in Economic Activity (IOAE), despite registering a 1.3% year-on-year growth. Furthermore, Gross Domestic Product and first-half-month Inflation data will be released on Thursday, providing further insights into Mexico's economic landscape.