USD/MXN stumbles on risk-on impulse, MXN bolstered by strong GDP

• The Mexican Peso rallied for the second straight trading session on the back of increased risk appetite amongst investors.
• The agreement reached over the weekend to raise the US debt ceiling stokes investor optimism, as reflected in rising equity futures.
• The US Dollar Index (DXY) remains static amidst rising US bond yields due to strong US data and a hawkish Fed, unable to prevent USD/MXN’s decline as Mexico’s ongoing GDP growth uplifts the Peso.
• ING analysts indicate that the Peso’s trajectory hinges on the Fed’s response to a possible recession, significantly if the US economy slows down amidst inflation worries.

USD/MXN dropped sharply as investors’ optimism spurred an appetite for riskier assets, meaning emerging market currencies appreciated against the US Dollar (USD). The Mexican Peso (MXN) rallied for the second straight trading session, with the USD/MXN down 0.36%. At the time of writing, the USD/MXN exchanges hands at 17.5550 after hitting a daily high of 17.6236.

White House-Congress debt ceiling agreement, strong US data underpin Peso’s rally against the US Dollar

During the weekend, talks between Republicans and Democrats delivered an agreement to raise the US debt ceiling, cheered by investors, as shown by equity futures rising. US President Joe Biden and House Speaker Kevin McCarthy remain confident that their agreement will pass Congress. Meanwhile, the latest tranche of economic data from the United States (US), puts the US Federal Reserve (Fed) on center stage, with odds for a 25 bps hike in June increasing from 25.7% to 58.4% on Monday.

US data improved, as shown by Retail Sales, Industrial Production, GDP, and Consumer Spending. In addition, the Fed’s preferred gauge for inflation, the Core PCE, stood at around the high of 4%. Consequently, the aggressive repricing on a hawkish Fed was witnessed by US bond yields, climbing sharply and underpinning the US Dollar.

The US Dollar Index (DXY) is almost unchanged at 104.240, though it failed to cap the USD/MXN fall. The Mexican Peso strengthened since last Friday as data from Mexico showed the country grew for the sixth consecutive quarter, with the Gross Domestic Product (GDP) increasing by 1% in the period.

“It all depends on whether inflation allows the Fed to respond to a recession. If the US does slow down quite aggressively and the Fed still has a problem with inflation and dollar rates stay high, then probably the Peso could start to suffer,” wrote analysts of ING.

During the weekend, the Chicago Fed President Austan Goolsbee said the Fed is improving on its inflation goal but has not succeeded, adding that interest rate increases take months or years to be felt by the economy. He said that the Fed can get inflation down without a recession.

USD/MXN Price Analysis: Technical outlook

USD/MXN remains downward biased after sliding below the 20-day Exponential Moving Average (EMA) at 17.7662, exacerbating a fall toward the psychological 17.5000 barrier. Drop below the latter could put the year-to-date (YTD) low of 17.4238 in play before testing 17.0000. Conversely, USD/MXN buyers must reclaim the 20-day EMA, so they can threaten to lift the pair toward the 50-day EMA at 17.9706.