USD/MXN plummets to seven-year low as Mexican Peso eyes the 17.0000 barrier

• Market anticipation for Banxico’s monetary policy decision influences USD/MXN trading activity.
• Disappointing New York Empire State Manufacturing Index adds to the US Dollar’s struggles.
• US debt ceiling talks and mixed messages from Federal Reserve speakers impact market sentiment.

USD/MXN prolongs its fall as the Mexican Peso (MXN) continues to strengthen, with the USD/MXN falling to a new seven-year low at around 17.4339, surpassing the July 2017 low of 17.4498, amidst a risk-on impulse that keeps most US equities on the green. The safety status of the US Dollar (USD), has been compromised, as a light US economic agenda, would leave investors leaning on market sentiment, and central bank speaking. At the time of writing, the USD/MXN is trading at 17.4424, down by 0.80%.

Risk-on impulse and light US economic agenda contribute to USD weakness

The week’s highlight is Banxico’s monetary policy decision, where the central bank is expected to keep rates unchanged at 11.25%. However, a few analysts are looking for a 25 bps rate hike to 11.50% after the bank decided to lift rates at a more gradual pace of 25 bps, with the central bank changing its language, saying that since the last monetary policy meeting, “annual headline inflation has decreased more than expected. For its upcoming decision, the Board will take into account the inflation outlook, considering the monetary policy stance already attained.”

Analysts at BBH noted that since Banxico’s last monetary policy meeting, “both headline and core have continued to fall, so we believe rates will likely be kept steady this week. The swaps market sees a steady rate for the next three months followed by the start of an easing cycle over the subsequent three months, which seems too soon to us.”

Therefore, the USD/MXN’s reaction on Monday could be traders positioning ahead of the Bank of Mexico’s decision.

Meanwhile, the US economic calendar revealed the New York Empire State Manufacturing Index disappointed investors, slumping to  -31.3 vs. the -3.9 estimated. The report revealed that nearly 50% of respondents to the survey said business conditions worsened, with the orders index sipping, while a gauge of prices showed an increase, and the employment component shrank.

The price rise would likely keep the US Federal Reserve (Fed) from pausing on its monetary policy, as Jerome Powell and Co. opened the door for a pause on the subsequent monetary policy reunions.

Meanwhile, discussions about raising the US debt ceiling in the United States (US) continued to grab the headlines. US President Joe Biden commented that talks were “moving along,” while Lael Brainard, the National Economic Director, commented that negotiations between both parties were serious and constructive.

Federal Reserve speakers had crossed news wires, with a solid battle between the hawks and the doves continuing. On the hawkish side, the Minnesota Fed President Neil Kashkari, although emphasizing that inflation is high but slowing down, said that the Fed has more work to do. Echoing some of his comments, Richmond’s Fed President Thomas Barkin said, “If inflation persists, or God forbid accelerates, there’s no barrier in my mind to further increases in rates,” he said to the Financial Times.

USD/MXN Price Analysis: Technical outlook

The USD/MXN would likely continue to trend lower, as shown by price action. Given that Banxico would keep rates unchanged or surprise the markets with a 25 bps rate hike do not discount the USD/MXN’s could fall as low as the 2016 yearly low of 17.0509, ahead of cracking the 17.0000 figure. Nevertheless, if USD/MXN buyers reclaim 17.5000, that could clear the path towards testing the 20-day EMA at 17.8281 before reclaiming the 18.0000 psychological level.