USD/MXN surges over 0.50%, breaking resistance levels as the US economy shows strength

• US economic data reinforces robust growth, diminishing odds for rate cuts by year-end.
• Hawkish Fed speakers bolster the US Dollar, pushing USD/MXN past critical resistance levels.
• The market awaits the Bank of Mexico’s rate decision amid anticipation of a pause in the tightening cycle.

USD/MXN rallies sharply by more than 0.50%, cracking critical resistance levels like the 17.5000 figure and the 17.6000 area, amidst a light economic calendar on the Mexican front, ahead of the Bank of Mexico’s (Banxico) decision. The latest round of economic data from the United States (US) proved that the economy is robust, while Fed speakers continued to favor rate hikes. The USD/MXN is trading at around 17.6710 after hitting a  low of 17.4809.

Bank of Mexico decision looms, US data support Fed hawkish narrative

Upward pressure on the USD/MXN has been sponsored by the above reasons. Retail Sales in the US showed the consumer’s resilience, while Industrial Production showed signs of a recovery on Tuesday. Wednesday’s data showed that Building Permits in April missed estimates by 1.437M to 1.416M, while Housing Starts improved from March’s plunge of -4.5%, to 2.2% in April, to a 1.401M annualized rate.

Given that the latest data still shows signs that the economy is solid, expectations that the Federal Reserve (Fed) would cut rates by the year’s end had been pushed back. Odds for two rate cuts by December lie at 40.4%, while for three rate cuts, they diminished to 26.9%, as shown by the CME FedWatch Tool.

Hence, US Treasury bond yields reflect the above-mentioned recovering ground and underpin the US Dollar (USD), a tailwind for the USD/MXN. The USD Dollar Index (DXY) is advancing 0.38%, up at 102.989, and about to test the 100-day Exponential Moving Average (EMA) at 103.187.

On the Fed speaking front, Fed officials maintained their hawkish rhetoric, led by Loretta Mester, Thomas Barkin, and John Williams. On the more neutral spectrum remains the newly appointed Aaron Golsbee, and Lorie Logan, though both reiterated that no rate cuts are expected.

Aside from this, the debt ceiling discussions showed some improvement, despite US House Speaker McCarthy continuing to say the two sides remain apart. He acknowledged that a deal could be done by the week’s end. President Biden announced that there was “consensus, I think, among the congressional leaders that defaulting on the debt is simply not an option.”

Before the meeting even started, there was news that President Biden was going to shorten his upcoming trip to Asia and return to Washington on Sunday after the G-7 summit in Japan.

On the Mexican front, USD/MXN traders’ eyes are on Banxico’s decision on Thursday, with most analysts estimating that the central bank will pause on its tightening cycle.

USD/MXN Price Analysis: Technical outlook

Even though the USD/MXN achieved back-to-back bullish sessions, the bias remains downwards. However, today’s jump in the spot price puts into play a test of the 20-day Exponential Moving Average (EMA), which, if broken, it would open the door to test the April 2018 swing low-turned-resistance at 17.9388. A breach of the latter will expose the 18.0000 as the USD/MXN pair recovers from early-year losses. Conversely, a retracement below 17.5000 would open the door to re-test the year’s lows around 17.40s.