Mexican Peso trades higher on positive market sentiment

• The Mexican Peso trades higher in its key pairs on the back of a posiitve shift in market sentiment.
• USD/MXN is impacted by a perceived change in stance from the Federal Reserve after a speech by its Chairman on Tuesday. 
• In Europe, political factors relating to up-and-coming elections impact EUR/MXN and GBP/MXN.
   

The Mexican Peso (MXN) trades higher in most traded pairs on Wednesday, helped by upbeat market sentiment. European bourses are up as investor's expect lower borrowing costs for companies following a fall in Producer Price Index (PPI) inflation data and commentary from European Central Bank (ECB) officials saying there could be further interest-rate cuts before the end of the year.   

The US Dollar (USD) is weakening against the Mexican Peso after a speech by the Chairman of the Federal Reserve (Fed) Jerome Powell reflected a change in stance from the more cautious rhetoric that preceded it.

Heightened political risk in Europe, meanwhile, ahead of key elections in France and the United Kingdom is causing volatility for the Euro and capping gains for the Pound Sterling.

At the time of writing, one US Dollar (USD) buys 18.22 Mexican Pesos, EUR/MXN trades at 19.62, and GBP/MXN at 23.15.

Mexican Peso rises versus the US Dollar after Powell speech

The Mexican Peso is rising against USD after a speech by Fed Chairman Jerome Powell on Tuesday took investors by surprise after the hitherto cautious commentary of his colleagues. Powell touted progress on inflation, which suggested the Fed was now closer to cutting interest rates. Lower interest rates are negative for a currency as they reduce foreign capital inflows.

The US Dollar’s downside is capped, however, by an increase in the chances that former US President Donald Trump could win the US presidential election in November. One hurdle on his path to the White House was removed on Monday when the US Supreme Court ruled he had partial immunity from charges he incited the uprising that followed his election defeat in 2020. Meanwhile, his rival, President Joe Biden is facing questions about his mental capacity following several gaffs made during a televised debate last Thursday. 

Europe on the march 

The Euro is holding up better against the Mexican Peso as risks subside that the far-right French National Rally (RN) party will gain an overall majority in the second round of the French elections on July 7. Although RN won the biggest share of the vote during the first round, the remaining centrists and socialists have formed a coalition to try to prevent RN from winning an outright majority in the second round. 

This coalition has left many moderate voters with stark choices, according to Reuters, and there is a risk they could boycott the election in many constituencies where neither extreme appeals to them. However, the coalition will make it harder for RN to win an outright majority, alleviating pressure on the Euro, which had been weakening due to concerns an RN government would destabilize the EU. 

Pound capped by UK’s fiscal woes

The Pound Sterling (GBP) is capped against the Mexican Peso by growing concerns about the UK’s finances ahead of the UK general election on July 4, according to Reuters. 

With little room for fiscal maneuver to kick-start growth through tax or spend policies, the new government may turn to the BoE to provide the necessary stimulus. This could mean the central bank lowers interest rates sooner than imagined, resulting in a weaker Pound. The supposed “independence” of the BoE, however, is one counterargument against this view; another is the still-hot wage inflation in the UK, which will prevent the BoE from cutting interest rates in the near term, according to Philip Bokeloh, Senior Economist at Abn Amro.

Technical Analysis: USD/MXN trades in a short-term range

USD/MXN meanders in a range after pulling back from its June 28 swing high at 18.59. It is currently at the lower end of the range, trading in the 18.20s. It is possible the pair is entering a sideways trend although it is still a little too early to be sure. 

USD/MXN 4-hour Chart 

If USD/MXN rallies and breaks above 18.59 it will make a higher high and likely continue up to 18.68 (June 14 high), followed by 19.00 (June 12 high). A break above 19.00 would provide strong confirmation of a resumption of the short-and-intermediate term uptrends.

A move below 18.06 (June 26 low), however, would suggest the short-term downtrend was resuming and probably see a continuation down to 17.87 (June 24 low).

The direction of the long-term trend remains in doubt.