Mexican Peso edges down as market sentiment ebbs, volatility falls

The Mexican Peso dips on Tuesday as market sentiment dips on a variable global interest-rate outlook.
Israel’s bombing of a tent camp in Rafah continues to keep geopolitical tensions fraught.
MXN maintains a bullish long-term trend on the back of a higher interest-rate outlook.

The Mexican Peso (MXN) edges lower in its most heavily traded pairs on Tuesday as market sentiment ebbs on continuing uncertainty regarding the global interest-rate outlook whilst Israel’s actions in Rafah keep tensions alive in the Middle East. Asian stock markets closed lower, with the Shanghai Composite down 0.46%, the Nikkei 0.11% lower and the ASX200 closing 0.28% in the red.

USD/MXN is exchanging hands at 16.68 at the time of writing, EUR/MXN is trading at 18.14 and GBP/MXN at 21.30.

Mexican Peso edges lower as sentiment dips

The Mexican Peso trades marginally lower in its key pairs on Tuesday as the low volatility trading environment endures. Traders are mostly in waiting-and-see mode ahead of the week’s key release: April’s US Personal Consumption Expenditure (PCE) data – the US Federal Reserve's (Fed) preferred gauge of inflation – out on Friday.

Mexican Unemployment data for April is scheduled on Thursday and the Mexican Presidential elections are on Sunday. At the moment the Morena party candidate Claudia Sheinbaum is expected to succeed Manuel Lopez Obrador as President, maintaining the status quo.

Mexican Peso supported by interest rate differential

The Mexican Peso is in an overall bullish trend in its key pairs, helped by the interest rate differential between Mexico and its major counterparts. High interest rates of 11.00% in Mexico continue to favor the Peso, which benefits from investor inflows.

A recent Citibanamex survey showed most economists expected Banxico to cut interest rates in June. However, Banxico Deputy Governor Irene Espinosa recently said that interest rates should remain at their current level because of continued inflationary pressures. Mid-month May headline inflation in Mexico showed a rise to 4.78%, surpassing the previous month’s 4.63%, confirming persistent inflationary pressures, and backing up Espinosa’s hawkish views.

Technical Analysis: USD/MXN trades in a holding pattern

USD/MXN – or the number of Pesos that can be bought with one US Dollar – trades flat after breaking below the grey trendline of the recovery from the May 21 low. Despite the break, the new short-term uptrend remains intact and still favors longs over shorts.

USD/MXN 4-hour Chart

A break above the 16.76 (May 23 high) would probably confirm a continuation of the young uptrend to a possible target at the previous range lows around 16.85.

The Moving Average Convergence Divergence (MACD) indicator has crossed below its red signal line, giving a sell signal and possibly indicating further weakness. A break below the swing low at 16.62 could indicate a possible continuation down to the low of May 21 at 16.52.

Given that the medium and long-term trends are bearish, there also remains a risk of the pair continuing lower due to longer-term currents.

Interest rates FAQs

What are interest rates?

Interest rates are charged by financial institutions on loans to borrowers and are paid as interest to savers and depositors. They are influenced by base lending rates, which are set by central banks in response to changes in the economy. Central banks normally have a mandate to ensure price stability, which in most cases means targeting a core inflation rate of around 2%. If inflation falls below target the central bank may cut base lending rates, with a view to stimulating lending and boosting the economy. If inflation rises substantially above 2% it normally results in the central bank raising base lending rates in an attempt to lower inflation.

How do interest rates impact currencies?

Higher interest rates generally help strengthen a country’s currency as they make it a more attractive place for global investors to park their money.

How do interest rates influence the price of Gold?

Higher interest rates overall weigh on the price of Gold because they increase the opportunity cost of holding Gold instead of investing in an interest-bearing asset or placing cash in the bank. If interest rates are high that usually pushes up the price of the US Dollar (USD), and since Gold is priced in Dollars, this has the effect of lowering the price of Gold.

What is the Fed Funds rate?

The Fed funds rate is the overnight rate at which US banks lend to each other. It is the oft-quoted headline rate set by the Federal Reserve at its FOMC meetings. It is set as a range, for example 4.75%-5.00%, though the upper limit (in that case 5.00%) is the quoted figure. Market expectations for future Fed funds rate are tracked by the CME FedWatch tool, which shapes how many financial markets behave in anticipation of future Federal Reserve monetary policy decisions.

Share: Feed news

Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers. The author will not be held responsible for information that is found at the end of links posted on this page.

If not otherwise explicitly mentioned in the body of the article, at the time of writing, the author has no position in any stock mentioned in this article and no business relationship with any company mentioned. The author has not received compensation for writing this article, other than from FXStreet.

FXStreet and the author do not provide personalized recommendations. The author makes no representations as to the accuracy, completeness, or suitability of this information. FXStreet and the author will not be liable for any errors, omissions or any losses, injuries or damages arising from this information and its display or use. Errors and omissions excepted.

The author and FXStreet are not registered investment advisors and nothing in this article is intended to be investment advice.