USD/MXN edges lower to near 20.00 as US Dollar remains tepid ahead of CPI release

• USD/MXN depreciates as the US Dollar faces challenges ahead of CPI data release.
• The upcoming US inflation report may provide insights into the scale of the Fed rate cut in September.
• Financial institutions expressed concerns that proposed judicial reforms could undermine judicial independence and deter foreign investment.

USD/MXN retraces its recent gains from the previous session, trading around 20.00 during Wednesday's European hours. This downside of the pair is attributed to the subdued US Dollar (USD) amid decreasing Treasury yields.

Traders await the US Consumer Price Index (CPI) data scheduled to be released later in the North American hours. This upcoming US inflation report may offer fresh cues regarding the potential magnitude of the Federal Reserve's (Fed) interest rate cut in September. Moreover, the recent US labor market report has cast doubt on the possibility of an aggressive Fed interest rate cut.

According to the CME FedWatch Tool, markets are fully anticipating at least a 25 basis point (bps) rate cut by the Federal Reserve at its September meeting. The likelihood of a 50 bps rate cut has slightly decreased to 31.0%, down from 38.0% a week ago.

The Mexican Peso (MXN) is under downward pressure due to concerns over judicial reforms and dovish expectations for the Bank of Mexico (Banxico). Investor sentiment has been weakened by a judicial reform bill passed by Mexico's lower house on September 4, which proposes electing judges rather than appointing them.

Financial institutions like Morgan Stanley and Julius Baer have raised concerns that this reform could be a threat to judicial independence and foreign investment. Both have issued warnings about the potential for credit downgrades, reflecting heightened risks to Mexico's economic stability.

On Monday, the latest Consumer Price Index (CPI) data showed that Mexican inflation was weaker than anticipated, boosting the likelihood that the Bank of Mexico (Banxico) will cut interest rates at its September meeting.

Kimberley Sperrfechter, an analyst at Capital Economics, noted that the latest inflation data and the possibility of a Federal Reserve rate cut next week "indicate that Banxico is on track to lower its policy rate by another 25 basis points in September."