USD/MXN drops toward 17.1000 after US CPI data, focus shifts to Core PPI

• USD/MXN trades lower after the release of US CPI data on Wednesday.
• US Dollar (USD) experienced downward pressure following the market sentiment of no interest rate hike by the Fed in September.
• Core PPI and Retail Sales will be eyed, seeking further cues on economic activities in the US.

USD/MXN continues the losing streak that began on Friday, trading lower around 17.1300 during the Asian session on Thursday. The pair is facing downward pressure following the release of the Consumer Price Index (CPI) data from the United States (US).

The data suggest the overall inflation may be moderating, the core rate, which excludes volatile components, remains relatively stable. The annual core rate met expectations by registering a reading of 4.3%, consistent with the previous figure of 4.7%.

However, the US CPI year-over-year rose to 3.7%, surpassing the previous rate of 3.2%, and it exceeded market expectations of 3.6% for August. Additionally, the monthly core CPI improved, increasing to 0.3% from the previous 0.2% for the same month. This uptick was unexpected, as it had been anticipated to remain unchanged.

Investor expectations have improved toward no interest rate hike by the US Federal Reserve (Fed) in the upcoming September policy meeting. The CME FedWatch Tool suggests that the Fed is likely to keep interest rates within the range of 5.25% to 5.50% for the September meeting.

Nevertheless, the likelihood of a 25 basis points (bps) rate hike in November remains at 40%, indicating growing expectations of the Fed implementing a tightening monetary policy later in the year. This suggests that while there might not be an immediate rate hike in September, investors anticipate the possibility of such a move in the near future.

US Dollar Index (DXY), which gauges the performance of the US Dollar (USD) against a basket of the other major six currencies, attempting to pull back from the gains it achieved the previous day. The spot price is trading lower around 104.70 by the press time.

DXY received upward support on Wednesday primarily due to the initial surge in US Treasury yields. However, it subsequently retraced, and the 10-year US bond yields traded at 4.23% at the time of writing.

The Mexican Peso is continuing its recovery from losses observed in the previous week, driven by the Bank of Mexico's (BoM) announcement that it will phase out its dollar hedging program. Additionally, the central bank has raised the benchmark interest rate 15 times since June 2021 at 11.25%.

BoM has also indicated its intention to maintain these elevated interest rates for an extended period. While inflation has come down to below 5%, it still remains well above the central bank's target of 3%. This challenging economic environment reflects the central bank's efforts to balance the need to control inflation with the potential impact on economic growth.

Market participants are currently focusing on upcoming data releases from the US, including the Core Producer Price Index (PPI) and Retail Sales figures for August. These datasets will serve as important indicators of economic activities in the US.

The data can provide valuable insights into the state of the US economy and potentially influence currency market sentiment, helping traders formulate their strategies when trading the USD/MXN pair.