USD/MXN dives to seven-year low, amidst risk-off mood, despite strong USD

• USD/MXN drops to a seven-year low, extending losses for the fourth consecutive week.
• Federal Reserve’s decision to keep rates unchanged weakens the US Dollar, propelling further USD/MXN losses.
• Hawkish remarks from Fed policymakers hint at further tightening if inflation doesn’t slow.
• Comments from Banxico officials suggest a possible rate cut in November, conflicting with Governor Victoria Rodriguez Ceja’s viewpoint.

The Mexican Peso (MXN) printed a new seven-year high against the US Dollar (USD), as the USD/MXN tumbled as low as 17.0360, extending its losses to four consecutive weeks. The Federal Reserve’s (Fed) decision to keep rates unchanged weakened the greenback, a headwind for the USD/MXN, which continued to fall amidst a risk-off impulse. At the time of writing, the USD/MXN is exchanging hands at 17.0449.

Banxico officials’ comments in focus, US Consumer Sentiment rises while inflation expectations ease

Wall Street turned negatively due to OpEx triple witching, with nearly 4.2 trillion options set to expire. Nevertheless, amidst Fed’s hawkish commentary, the risk-sensitive Mexican Peso held to its weekly and daily gains that followed the Fed’s decision.

Data from the United States (US) showed that inflation is cooling down, but not at the pace the US central bank would like. However, they failed to pull the trigger and would wait for the July meeting to deliver the first of two 25 bps rate hikes priced in by investors, which are expecting the first rate cut in early 2024.

That propelled the USD/MXN to new seven-year lows during the last two days, even though Fed policymakers revised upward peak rates upwards, above the 5.50% threshold.

On Friday, the US agenda revealed that consumer sentiment for May in the US rose by 68.0 above May’s 64.9 final reading. The same poll from the University of Michigan (UoM) depicted that inflation expectations for one year eased from 4.2% to 3.3% in June.

Meanwhile, US central bank officials crossed wires hawkishly, though they failed to underpin the USD/MXN. Richmond’s Fed President Thomas Barkin said he wants to do “more” if inflation doesn’t slow down. Fed Governor Christopher Waller added that slow progress on inflation “will probably require some more tightening.”

On the Mexican front, the lack of economic data was not an excuse for the MXN to continue to gain strength vs. the buck. Comments from the Bank of Mexico (Banxico) deputy Governor Jonathan Heath opened the door for the Mexican central bank’s first rate cut in November. Contrary to his point of view, Banxico’s Governor Victoria Rodriguez Ceja commented that rates would be unchanged at the current bank rate of 11.25% for at least two meetings. However, it did not open the door to easing policy.

Upcoming events

On the US front, Fed speakers would be grabbing most headlines, alongside the release of housing data and S&P Global PMIs. On the Mexican front, the agenda will reveal Retail Sales ahead of the Banxico monetary policy decision.

USD/MXN Price Analysis: Technical outlook

The USD/MXN extended its fall past the 2016 low of 17.0509, poised to challenge the 17.0000 figure. Even though oscillators remain in overbought conditions, with the Relative Strength Index (RSI) below 30, the three-day Rate of Change (RoC) suggests some selling pressure lies ahead. However, failure to crack the 17.0000 mark could expose sellers to a squeeze as Banxico’s monetary policy decision looms.

Nevertheless, the path of least resistance in the near term is downwards. The USD/MXN’s next stop would be 17.0000. if USD/MXN dives beneath that level, the psychological 16.50 would be next, ahead of testing the October 2015 low of 16.3267. Conversely, USD/MXN upside risks lie in the confluence of May’s 15 low and the 20-day Exponential Moving Average (EMA) at 17.4038/42, followed by the 50-day EMA at 17.6963.