• USD/MXN continues to lose ground due to the dovish mood surrounding the Fed.
• The downside of the US Dollar is retrained due to improved Treasury yields.
• The Mexican Peso may struggle as traders expect Banxico to adopt a dovish stance regarding its policy outlook.

USD/MXN extends its losses from the previous session, trading around 18.80 during Thursday’s European hours. This decline of the USD/MXN could be attributed to the increasing expectations of at least a 25 basis point rate cut by the US Federal Reserve (Fed) in September.

The US Dollar (USD) remains tepid ahead of the release of US Initial Jobless Claims and Retail Sales data scheduled for Thursday. The US Dollar Index (DXY), which measures the value of the US Dollar (USD) against other six major peers, received support from the improved Treasury yields. The DXY trades around 102.60 with 2-year and 10-year yields on US Treasury bonds standing at 3.95% and 3.82%, respectively, at the time of writing.

The moderate increase in the annual US Consumer Price Index (CPI) has sparked debate about the extent of the Fed’s potential rate cut in September. Traders are favoring a more modest 25 basis point reduction, with a 60% probability, while a 50 basis point cut is still on the table. According to CME FedWatch, there is a 36% chance of the larger cut occurring in September.