USD/MXN faces barricades around 18.70 as upside looks capped ahead of US Inflation

The USD/MXN pair is struggling to extend its recovery move above 18.70 in the early European session. The asset attempted a rebound move after refreshing the weekly low at 18.63, however, the recovery move looks less confident as the market sentiment is extremely negative.

Investors have underpinned the risk-aversion theme as airborne threats on the United States have triggered geopolitical tensions. Also, soaring anxiety among investors ahead of the release of the United States inflation data has added to the risk-off impulse. S&P500 futures are continuously adding losses as investors expect that higher inflation will add to the consensus for higher interest rates by the Federal Reserve (Fed).

The US Dollar Index (DXY) has turned sideways after shifting its auction above 103.40 as investors are getting prepared for a fresh upside amid a higher appeal for safe-haven assets. Higher interest rates by the Fed after a surprise rise in inflation will result in more divergence in policy comparison of other economies with the Fed. The alpha provided on 10-year US Treasury yields is holding itself above 3.74% as bets scaled higher for more stubbornness in the US inflation.

A Reuters poll indicates that the monthly headline CPI and core inflation that excludes oil and food prices will escalate by 0.4%. The annual headline CPI is seen lower at 5.8% against the former release of 6.5% while the core inflation that excludes oil and food prices is seen lower at 5.4% versus 5.8% in the former release.

Meanwhile, the hawkish monetary policy by the Bank of Mexico (Banxico) has failed to provide strength to the Mexican Peso. Last week, Banxico hiked interest rates by 50 basis points (bps) to 11%. Analysts at Commerzbank stated their views on the monetary policy “Banxico is proving to be an inflation fighter after the departure of central bank member Gerardo Esquivel, who was considered a big dove, which should in principle help the Peso.”