USD/MXN depreciates to 17.07 due to better risk appetite, focus on Mexico's trade balance

• USD/MXN extends losses due to improved risk appetite.
• Dollar Index falls to around 103.60 amid moderating US Treasury yields.
• Banxico officials anticipate the possibility of applying the first rate cut in March.

USD/MXN extends its losses for the second day in a row, trading lower at a two-day low at 17.07 during early European hours on Tuesday. This decline can be attributed to the weakening of the US dollar (USD), mainly influenced by the moderation in US Treasury yields. Furthermore, improving risk appetite in the markets puts additional bearish pressure on the dollar, acting as a headwind for USD/MXN.

The US Dollar Index (DXY) falls to 103.70, amid moderation in US Treasury yields. At the time of writing, the 2-year and 10-year US bond yields stand at 4.71% and 4.28%, respectively. The Federal Open Market Committee (FOMC) minutes have reinforced a data-dependent approach by the Federal Reserve (Fed), signaling a more dovish stance, which has further weighed on the US dollar (USD).

Investors will closely monitor several key economic indicators due to be released later this week, such as fourth-quarter Annualized Gross Domestic Product and US PCE inflation.

On the other hand, the recent minutes of the meeting revealed that three monetary policy makers at the Bank of Mexico (Banxico) are considering the possibility of applying the first rate cut at the March meeting. This consideration is reinforced in light of the economic slowdown highlighted by recent inflation figures. This sentiment could put pressure on the Mexican peso and consequently support the USD/MXN pair.

Market participants await the release of January trade balance data on Tuesday, paying particular attention to the possible implications for the economic outlook and currency movements.