USD/MXN: Peso recovers from two-week low towards 17.00 with eyes on Mexican Inflation

• USD/MXN snaps two-day winning streak by reversing from the highest level in a fortnight.
• US Labor Day Holiday, mixed sentiment allow Mexican Peso to regain upside momentum.
• Mexico Headline Inflation for August, US ISM Services PMI eyed for clear directions.

USD/MXN reverses from a two-week high, as well as snaps a two-day winning streak, while declining to 17.05 during the early hours of Monday’s Asian session. In doing so, the Mexican Peso (MXN) pair justifies the market’s doubts about the Federal Reserve’s (Fed) ability to lift the rates further while also suggesting the hawkish bias about the Mexican central bank, namely the Banxico.

The US Dollar barely managed to post a positive weekly close after a downbeat start as a downward revision to the Q2 US GDP growth and softer PMIs prod the DXY bulls initially before the upbeat prints of inflation clues and mostly impressive employment statistics.

On Friday, the headline US Nonfarm Payrolls (NFP) rose to 187K in August versus 170K expected and 157K prior (revised) even as the Unemployment Rate marked an uptick to 3.8% from 3.5% market forecasts and previous readings. Further, the Average Hourly Earnings also eased to 0.2% and 4.3% compared to 0.4% and 4.4% respective priors. Additionally, the US ISM Manufacturing PMI also impressed the US Dollar buyers with the 47.6 figures versus analysts’ estimation of 47.0 versus 46.4 previous readings.

It’s worth noting that Federal Reserve Bank of Cleveland President Loretta J. Mester downplayed the increase in the Unemployment Rate to 3.8% by stating that the level "is still low." The policymaker termed the US job market as strong despite recent rebalancing as she spoke at an event in Germany. About inflation, Fed’s Mester acknowledged that progress has been made but noted it remains elevated.

Even so, the latest readings on the interest rate futures, suggest a nearly 90% chance of the Federal Reserve’s (Fed) inaction in September, as well as the receding odds of witnessing one more rate hike in 2024, which in turn prods the US Dollar amid the US holiday.

On the other hand, the Officials at the Banxico appear hawkish and hence this week’s Mexican Headline Inflation for August, up for publishing on Thursday, as well as Wednesday’s US ISM Services PMI, become crucial for the pair traders to watch.

It should be noted that China stimulus and the US-China tension are extra filters, apart from the mixed US data, that challenge the USD/MXN moves.

While portraying the mood, the benchmark US 10-year Treasury bond yields have been declining in the last two consecutive weeks after rising to the highest levels since 2007, to 4.18% at the latest. Further, the Wall Street benchmarks also improved in the recent few days, despite Friday’s sluggish closing, while the S&P 500 Futures printed mild losses by the press time.

Looking ahead, a light calendar and the US holiday may allow the USD/MXN to consolidate the previous weekly losses.

Technical analysis

Although a downward-sloping resistance line from late May, around 17.20 by the press time, caps the USD/MXN pair’s immediate upside, the sellers need validation from a convergence of the 50-DMA and 21-DMA, close to 16.98–97 to retake control.